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Emerging Market Woes Overshadow Coca-Cola's Q2 EPS Beat

SunTrust slashed its estimates on The Coca-Cola Co KO 0.41% as emerging markets woes overshadowed the beverage giant's second quarter EPS beat.

The company reported adjusted EPS of $0.60, above SunTrust estimate of $0.57 and the consensus estimate of $0.58 on better than-expected gross margin (60.5 percent vs. 59.8 percent estimate).

In addition, Coke's net sales of $11.524 billion (-5.1 percent YoY) was above SunTrust estimate of $11.48 billion (-5.5 percent YoY) but below the consensus estimate of $11.64 billion (-4.2 percent YoY).

"The weak volume performance was due to declining volumes in large emerging markets (notably China, Brazil, Argentina), as both developed and developing markets posted positive volumes and price/mx," analyst William Chappell wrote in a note.

Specifically, in China, the company not only hit by weaker overall demand, but also inventory destocking from wholesalers which negatively impacted Coke's bottling operations. Notably, China is Coke's largest international bottling operation and the company still owns over one third of the system.

Going forward, Coke said it plans to offer more affordable packaging and products to address the macro-slowdown in its emerging markets, but it does not expect to see a meaningful improvement in China for the foreseeable future.

Chappell also cut his 2016 and 2017 EPS estimates to $1.89 and $1.95, respectively (from $1.91 and $2.02).

That said, Chappell maintained his Buy rating on the stock saying he still believes the refranchising of Coke's bottling network will position the company as a higher margin business, more focused on its core concentrate business.

"We note that during 2Q, KO's core concentrate organic growth, which excludes revenue from owned bottlers, was actually up 4% during the quarter. We view the 4% growth as a good proxy of the company's potential post transition," Chappell added.

Jul 2016JefferiesMaintainsHold
Jul 2016Stifel NicolausMaintainsBuy
Jun 2016Goldman SachsMaintainsNeutral

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