May 29, 2013
Coca-Cola Enterprises Inc.
(CCE-NYSE)
$37.38*
Note: This report contains substantially new material. Subsequent reports will have new or revised materials
highlighted.
Reason for Report: 1Q13 Earnings Results Update.
Prev. Ed.: Apr 08, 2013; 4Q12 and FY12 Earnings Update (broker material considered till Mar 22)
Brokers’ Recommendation: Neutral: 50.0% (6), Positive: 41.7 % (5), Negative: 8.3% (1) Prev. Ed: (6;5;1)
Brokers’ Target Price: $38.25 (↑$1.17, 10 firms) Brokers’ Avg. Expected Return: 2.3%
*NOTE: Though dated May 29, 2013; share price and brokers’ material are as of May 10, 2013.
NOTE: The tables below (Revenues, Margins Earnings per Share, and Balance Sheet) contain material from fewer
brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have
accompanying spreadsheet models.
Portfolio Manager Executive Summary
Coca-Cola Enterprises Inc. (CCE) is one of the world’s largest independent bottlers for Coca-Cola.
Neutral and Negative or equivalent outlook (7/12 analysts): The firms with a neutral outlook
appreciate the company’s strong cash position and cost control strategy. They believe that the Business
Transformation program will help the company optimize its business in the upcoming quarters. However,
the firms prefer to stay on the sidelines as the company reduced its FY13 revenue guidance. Also the
company is geographically focused on Western Europe, the bearish firms are concerned that the
company will need time to overcome hurdles like a hike in French Excise tax and increased competition
in Great Britain.
Positive or equivalent outlook (5/12 analysts): The bullish firms appreciate the company’s strong
brand portfolio. They appreciate that the company did not acquire the German bottling company and
instead focused on improving its share repurchase. The firms have faith that the company will be able to
overcome the present hurdles and achieve strong growth in the immediate quarters.
May 29, 2013
© Copyright 2013, Zacks Investment Research. All Rights Reserved.
Overview
Coca-Cola Enterprises Inc. is a leading Western European company, producing, distributing and
marketing non-alcoholic beverages. The company operates in Belgium, continental France, Great Britain,
Luxembourg, Monaco, the Netherlands, Norway and Sweden.
In Oct 2010, Coca Cola Enterprises sold its North American operations to TCCC and took over the
latter’s bottling operations in Norway and Sweden. Coca-Cola Enterprises thus became a newly
registered public company consisting of legacy Coca-Cola Enterprises European bottling operations, as
well as the bottling operations in Norway and Sweden acquired from TCCC.
Coca Cola Enterprises is now The Coca-Cola Company’s (TCCC) strategic bottling partner in Western
Europe and has a 10-year bottling agreement with the latter for each of its territories that will end on Oct
2, 2020. In addition to this, the companies have entered into a concentrate pricing agreement which
extends through Dec 31, 2015.
The analysts identified the following issues as critical to an evaluation of the investment merits of CocaCola Enterprises:
Key Positive Arguments
The company commands a strong portfolio of popular
brands, enjoys strong consumer acceptance.
Key Negative Arguments
Increasing commodity costs consistently hurt
margins and earnings.
The company generates strong cash flow and CocaCola Enterprises is financially well leveraged.
The company is geographically focused in Western
Europe and is thus exposed to the economic
uncertainty including the debt burdens of some of
these countries.
The company’s top line was hurt by hike in French
excise tax which was introduced by French
regulatory authorities from Jan 2012 onwards.
The company is one of the largest Coca-Cola bottlers
in the world. The collaboration helps the company to
create and develop new brands, market products in
an efficient manner and also maximize efficiency.
The company is diligently trying to control its
expenses and is targeting focused reductions across
all discretionary cost categories. The resultant
savings can be invested in the business to optimize
the marketplace opportunities and improve long-term
growth.
Coca-Cola Enterprises’ fiscal year references coincide with the calendar year.
More information on the company is available on its website www.cokecce.com.
May 29, 2013
Long-Term Growth
The company believes that it will be able to cope with the slow economic recovery in Europe and deliver
profitability in the long term. Over the long run, the company intends to achieve annual revenue growth of
4% to 6%, operating income growth of 6% to 8%, high single-digit growth in terms of annual earnings per
common share and at least 20 basis points (bps) growth in annual return on invested capital (ROIC).
The company also believes that it can attain its long-term objectives by capitalizing on its brand value
and increasing operational efficiencies. The company considers that a balanced growth of volume and
price/mix is required to achieve its long-term targets.
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Another important growth strategy of the company includes reinvesting in business to generate growth
and maintain existing facilities and operations. As such, the company’s long-term plan includes increase
in capital expenditures to the range of 4% to 4.5% of total net sales growth.
The company intends to strengthen its brand portfolio by improving the value of existing brands and
increasing its product portfolio. The company also intends to focus on brand building of light core brands
like Diet Coke/Coca-Cola Light and Coca-Cola Zero to capture benefits from growing health
consciousness among consumers. The company expects steady volume growth in energy, stills and
sparkling flavor brands in the long run.
May 29, 2013
Target Price/Valuation
Rating Distribution
Positive
Neutral
Negative
Highest Target Price
Lowest Target Price
Avg. Target Price
No. of Analysts with Target Price/Total
41.7%
50.0%
8.3%
$43.00↑
$34.00
$38.25↑
10/12
Risks associated with the target price primarily include input cost increases, volatile pricing environment
and changes in foreign exchange.
Recent Events
CCE Beats 1Q Earnings; Misses Rev – Apr 25, 2013
Coca-Cola Enterprises’ first-quarter 2013 adjusted earnings of $0.39 per share beat the Zacks
Consensus Estimate of $0.38 by a penny. Currency translation had an adverse impact of $0.01 per
share. Adjusted earnings rose 8.3% year over year driven by operating income growth and lower share
count resulting from share repurchases in the quarter.
The company’s right to acquire the German bottling business from The Coca-Cola Company will expire
on May 25. However, management has decided not to go ahead with the proposed buyout deal at this
moment. This decision enabled Coca-Cola Enterprises to increase its share repurchase goal for the year.
Revenues and Margins
During the quarter, net sales dipped 1.0% to $1.90 billion. Reported revenues missed the Zacks
Consensus Estimate of $1.91 billion.
The volume of Sparkling drinks declined about 2%. Still beverages witnessed a modest decline, partially
offset by a respective 3.5% and 4.0% volume growth in Coca-Cola Zero and energy drinks.
Adjusted operating income increased 3.5% to $180 million due to lower operating expenses reflecting the
impact of one fewer selling day and the benefits of ongoing expense control and timing.
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Fiscal 2013 Outlook
Although the company increased its prior guidance for fiscal 2013 earnings to reflect higher share
repurchase and it reduced its expectation for revenues. The company continues to expect currency
neutral adjusted earnings growth in the range 11%—12%, up from 10% as guided earlier. The target
looks encouraging, considering it is higher than the company’s long-term target of high single-digit
growth.
At the current rates, currency translation is expected to reduce full-year earnings per share by
approximately 1% to 2% in contrast to a 2% to 3% benefit expected earlier.
Revenues
Coca-Cola Enterprises reported revenues of $1.90 billion in 1Q13, down 1% y/y both on a currency
neutral basis (excluding the impact of French excise tax) and a reported basis. The Zacks Digest average
is in line with the company results.
The company’s overall results in the quarter were hurt by several challenges such as cold and wet
weather, overall soft macroeconomic conditions, steep price competition in Great Britain and difficult
beverage market conditions in France due to increase in French excise tax (FET).
The hike in French excise tax was introduced by French regulatory authorities from Jan 2012 onwards.
The increased excise tax was levied on beverages with added sweeteners, which is applicable to almost
all drinks that the company sells in France. The company intends to pass on these costs to consumers in
the form of higher retail prices for its products.
Coca-Cola Enterprises’ net pricing per case increased 2.0% in the quarter. Cost of goods per case
increased 3.0%, on the back of increased cost of sweetener and package mix-shifts.
Volumes (bottle and cans) declined 1.5% in the quarter, which is a sequential improvement over prior
quarter decline of mid single-digit. The volume decline was due to a dip in the sales of sparkling
beverages in continental Europe, partially offset by the volume increase in Great Britain. As such,
volumes declined 3.0% in continental Europe but improved 1.0% in Great Britain. Brands which
performed well include Coca-Cola Zero, Monster and Capri-Sun, whereas sales of Coca-Cola Classic
and Diet Coke/Coca-Cola light declined in the quarter.
Provided below is a summary of total revenue, as compiled by the Zacks Digest:
Revenue ($M)
1Q12A
4Q12A
2012A
1Q13A
2Q13E
2013E
2014E
2015E
Total Revenue
$1,868.0
$1,916.0
$8,062.0
$1,850.0
$2,262.2
$8,256.6↓
$8,562.3↓
$8,845.7↓
Digest High
$1,868.0
$1,916.0
$8,062.0
$1,850.0
$2,295.0
$8,296.4↓
$8,695.1↓
$9,046.4↓
Digest Low
$1,868.0
$1,916.0
$8,062.0
$1,850.0
$2,238.7
$8,220.0 ↓
$8,384.0↓
$8,678.0↓
1.3%
1.2%
-2.7%
-1.0%
2.5%
2.4%↓
3.7%↓
3.3%↓
Year-over-Year Growth
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Outlook
The company expects FY13 net sales to grow in the low to mid single-digits range less than the previous
expectation of a mid single-digit increase) on the back of declining volume and the weak macroeconomic
conditions.
Most firms are concerned about lowering of the revenue guidance witnessed by the company for the past
few quarters.
Please refer to the Zacks Research Digest spreadsheet on CCE for specific revenue estimates.
Margins
Gross profit was $634 million in 1Q13, down 3.4% y/y. Gross margin contracted due to hike in commodity
costs, particularly sweetener and restrictive pricing due to tough market conditions. The Zacks Digest
average gross profits were in line with the company results. Adjusted selling, delivery and administrative
expenses in 1Q13 were $460 million, down 4.0% y/y, on the back of cost controls initiatives and decline
in volume.
Adjusted operating income was $180 million in 1Q13, up 2.5% y/y, on the back of lower selling, delivery
and administrative expenses. The Zacks Digest average operating income was in line with the company
results.
Norway Business Optimization Program
In early 2012, the company initiated a restructuring project in Norway in order to achieve operational
efficiency. The program is expected to incur $60 million in capital expenditure and about $60 million in
non-recurring restructuring charges in fiscal 2013. The project includes a transition to a more effective
distribution system.
Business Transformation Program
In the third quarter of 2012, The company has announced a program in order to increase operational
efficiency and maintain sustainable growth in the long term. The program involves commercial
restructuring to shift to an improved and efficient consumer service model. The program aims to improve
the effectiveness of its go-to- market strategies and sales and marketing organization, back office
functions and to better align its operating structure with the challenging and changing marketplace. The
plan is expected to result in approximately $100 million in ongoing benefits by 2015 against one-time
restructuring charges of $200 million through 2014. The program is also expected to result in workforce
reduction. The resultant savings can be invested in the business to optimize the marketplace
opportunities and improve long-term growth.
A couple of firms appreciate the Business Transformation Program adopted by the company and believe
that the company will benefit from the program over the long term.
Provided below is a summary of margins as compiled by Zacks Digest:
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Margins
1Q12A
4Q12A
2012A
1Q13A
2Q13E
2013E
2014E
2015E
Gross
35.0%
34.8%
36.0%
34.6%
36.8%
35.8%↑
35.8%↑
36.2%↑
Operating
9.4%
10.9%
12.6%
9.7%
14.3%
12.8%↑
13.0%↑
13.3%↑
Pre-Tax
8.2%
9.5%
11.5%
8.3%
13.2%
11.5%↑
11.7%↑
12.0%↑
Net
6.0%
6.8%
8.4%
6.0%
9.6%
8.4%↑
8.5%↑
8.7%↑
Outlook
The company expects its FY13 operating income to grow in the mid single-digit range year-over-year.
However, gross margin is expected to decline as the increase in net pricing per case growth is expected
to be offset by higher cost of sales per case. Management expects a moderately favorable commodity
cost environment for the remainder of the year. Effective tax rate is expected to be in the range of 26% to
28%.
Please refer to the Zacks Research Digest spreadsheet on CCE for specific margin estimates.
Earnings per Share
Coca-Cola Enterprises reported EPS of $0.39 in 1Q13, up 8.3% y/y, driven by an increase in operating
income and lower share count resulting from significant share repurchases in the quarter.
Provided below is a summary of EPS, as compiled by Zacks Digest:
EPS
1Q12A
4Q12A
2012A
1Q13A
2Q13E
2013E
2014E
2015E
Digest High
$0.36
$0.45
$2.26
$0.39
$0.79
$2.53↓
$2.88↓
$3.22↓
Digest Low
$0.36
$0.45
$2.25
$0.39
$0.76
$2.46
$2.71↓
$2.95↓
Digest Avg.
$0.36
$0.45
$2.26
$0.39
$0.77
$2.50↓
$2.82↓
$3.12↓
Digest YoY growth
9.1%
24.0%
3.5%
8.1%
5.4%
10.5%↓
12.8%↑
10.8%↓
Acquisition of German bottling Business
Coca-Cola Enterprises’ right to acquire German bottling business from The Coca-Cola Company expired
on May 25.
Share Repurchase
Coca-Cola Enterprises began its third share repurchase program worth $1.5 billion in Jan 2013. The
company expects to repurchase shares worth at least $1 billion during 2013, up from the prior
expectation of $500 million.
Outlook
For fiscal 2013, the company continues to expect currency neutral adjusted earnings growth in the range
11%—12%, up from 10% as guided earlier, on the back of increased share repurchase. The company
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expects 2013 earnings growth to exceed the long term target of high single digit growth. The company
expects currency translations to drag 2013 earnings per share by 1% to 2%.
Most firms are optimistic about the hike in earnings guidance, on the back of increased share repurchase
expectation. They believe that not acquiring German bottling business and increasing cash returned to
the shareholders will benefit the company.
Please refer to the Zacks Research Digest spreadsheet on CCE for more extensive EPS figures.
StockResearchWiki.com – The Online Stock Research Community
Discover what other investors are saying about Coca-Cola Enterprises Inc. (CCE) at:
CCE profile on StockResearchWiki.com
Research Analyst
Lead Analyst
QCA
Copy Editor
Content Ed.
Last done by
Reason for Update
Sarmistha Roy Chowdhury
Kinjel Shah
Kinjel Shah
Kamalika Pramanik
Kinjel Shah
Sarmistha Roy Chowdhury
1Q13
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