Coca-Cola, Others Blame it on the Rain

Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The expectations for second-quarter earnings were never that stellar. Corporate profits were largely expected to be at their lowest levels in years amid a stronger dollar that's hurting overseas profits. In many cases, results have been surprising to the upside but there is another common theme that's surfacing among under-performing companies -- bad weather. So should investors be worried or will the storm clouds dissipate?

Is Coke still it?

In the second quarter, Coca-Cola (NYSE: KO) reported a 1% increase in global volume, below expectations. Growth in the Americas was up 1% while the international division generated 2% volume growth. Net revenue fell 3% in the quarter and is down 2% year-to-date. Without the impact of structural changes, revenue grew. Operating income also fell 2%, while reported EPS dropped 3% to $0.59. 

Indeed, currency headwinds were part of the problem for the lackluster performance, but the company also pointed up. Muhtar Kent, Coca-Cola's chairman and chief executive explained: 

Our second quarter volume results came in below our expectations, reflecting an ongoing challenging global macroeconomic environment and unusually poor weather conditions in the quarter.

Indeed, wet and cold weather interfered with consumer spending and exacerbated the problems stemming from already-weak economies in Europe, Latin America, and Asia. And while the bad weather does sound like an excuse, it's fair that damp weather could lessen the demand for cold beverages. 

However, unlike rival PepsiCo (NYSE: PEP), a restructuring story since last year, Coca-Cola doesn't have a snack-food business to lean on when times are tough. Indeed, PepsiCo has been in turnaround mode, and has been investing across business segments and marketing.

After a wave of cost-cutting initiatives that included layoffs, PepsiCo, which generated $65 billion in net revenue last year (a 1.5% decline from 2011), seems to be exactly where it wants to be. The company has strategically positioned its portfolio for growth in both its salty snacks and beverage businesses, and currently generates about 35% of its total net revenue from developing and emerging markets.

PepsiCo's second quarter delivered better-than-expected EPS of $1.31 (excluding items) versus consensus of $1.19. Core gross margins and core operating margins, each up more than 100 basis points in the quarter, are rising, and revenue was basically in-line at $16.8 billion. No mention of weather-related headwinds.

Last year, PepsiCo lifted its investment in its brands by 50 basis points to 5.7% of net revenue, and that's a trend that's spilled over into this year. 

In 2013, PepsiCo is returning some $6.4 billion to shareholders via share buybacks ($3.0 billion) and dividends ($3.4 billion).  PepsiCo's not immune to volume volatility, but the company says that 60% of the $20 billion U.S. beverage market belongs to non-carbonated drinks; plus, the percentage that belongs to cola beverages is shrinking. So this bodes well for a company with a diversified portfolio, like PepsiCo. But what does it mean for rival Coca-Cola?

Does this mean that Coca-Cola should make a push into the snack-food segment? Not necessarily; other rival Dr Pepper Snapple Group isn't in the snack-food or alcoholic beverage market and has no intentions of entering those markets, either. For Coca-Cola, if it comes down to its marketing push, the company shouldn't have any problem. After all, it's "Coke Is It" campaign was one of the most memorable in history. Coca-Cola has history on its side.

Marketing push

In the second quarter, Coca-Cola ramped up its marketing spend in Europe and North America with its regional campaigns, 'Share a Coke" and "Coca-Cola Open Summer," respectively. These marketing campaigns were responsible for rising global volume and value share in its sparkling beverages.  It's also pushing marketing campaigns in Euroasia and Africa that are boosting its sparkling beverage volumes in those regions. Coca-Cola also has a marketing program that includes glassware tied to the 2014 Winter Olympics in Russia.

In the second quarter, there was a "strong increase" in direct marketing spend, according to the company, and this could be precisely what the company needs for a turnaround.  Coca-Cola is in the midst of a productivity and reinvestment program in which it's reinvesting in a series of areas including global marketing. The program runs through 2015, and the company expects to achieve annualized savings of some $650 million as a result. If successful, the benefits are expected to surface in 2015. 

Ongoing risks

Meanwhile, over at Six Flags Entertainment (NYSE: SIX), weather is an ongoing risk to the company's business because when it rains, it keeps amusement-park goers away. In this case, adverse weather isn't the worst of the company's problems, as a tragic and fatal accident at its Arlington, Texas amusement park took the life of one of Six Flags' guests last weekend. In discussing performance, the company's president and chief executive Jim Reid-Anderson said:  

I am pleased with our record year-to-date financial performance, despite cooler temperatures and unprecedented levels of precipitation at our Eastern and Mid-Western parks during the second quarter..

Unfavorable weather caused second-quarter earnings to fall 34% to $47.4 million versus $72.3 million in the year-ago period. The company's income tax expense grew to $32.4 million from $1.2 million, weighing on results. Revenue fell 3% to $363.7 million, which was below consensus estimates.

Over the first half of the year, the company witnessed an increase in guest spending and a 1.0% increase in attendance. But that could certainly change. The ride is closed for now, and according to the company's earnings call, "there could be a short-to-medium term effect" on attendance at the Arlington, Texas theme park.

The impact from the accident hasn't yet surfaced in performance. Six Flags emerged from bankruptcy three years ago and shares have advanced nearly 35% in the past year. But there doesn't appear to be a catalyst for further growth and there's too much uncertainty following the tragedy. So I'm staying away, despite the fact that the company has paid $88 million in dividends in the first half of the year and repurchased $404 million in shares. 

Six Flags is trading cheap at a 9.5 P/E ratio and it has a forward multiple of about 15. In the most recent quarter, the company generated $92.3 million in free cash flow but it has net debt of $1.2 billion. 

Conclusion

With a forward PE of 19, Coca-Cola is fairly valued. For the investor whose patient, and can wait to see the results of the company's reinvestment plan, I would hold on. Otherwise, PepsiCo is in growth mode and its successfully diversifying its revenue streams. Therefore, PepsiCo seems to be a more compelling opportunity at the moment.

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Gerelyn Terzo has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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