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The Coca-Cola Co oozes optimism for 2018, but is it misplaced? - Analysis

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2017 turned out to be a pretty good year for The Coca-Cola Co. Refranchising its distribution network may have sent reported performance into a tailspin, but underlying sales were buoyant (+3%), especially when compared to the challenges faced by rival PepsiCo's beverage divisions.

Coca-Colas Honest Tea brand is set for a wider roll-out this year

Coca-Cola's Honest Tea brand is set for a wider roll-out this year

But almost as soon as Coca-Cola sent out its full-year results on Friday, attention turned to the year ahead and what lies in store for the world's biggest soft drinks producer. According to Coca-Cola itself, there is plenty to be optimistic about.

Indeed, on a conference call immediately after the results, analysts expressed surprise at just how confident the company was for 2018, calling into question Coca-Cola's stated guidance of 4-6% organic sales growth.

Coca-Cola CEO James Quincey offered a robust response, despite appearing slightly miffed that his ambitions were being placed under the spotlight ("I do appreciate that you're all trying to talk me down from the revenue guidance," he said at one juncture). 

Quincey highlighted Coca-Cola's improved performance in Q3 and especially Q4 that he said put the company on a better footing coming into 2018. He also said strong work had been done on portfolio expansion that is starting to have an effect on the business ("You can see that some of that coming through in the fourth quarter," he explained), while previous headwinds in emerging markets such as Brazil and India were levelling off. Furthermore, the company was pulling levers on packaging size, especially in Europe, where smaller packs were improving the top line even as volumes remained flat.

"The results are starting to come," Quincey said. "The momentum is building. We're not out of the woods in 2018. The world still remains uncertain and volatile. But I think the momentum in the business and the momentum in the actions that we laid out that needed to be taken - plus a little bit of an improvement in the emerging macros - make us confident that 4% is a good number for 2018."

As far as Quincey was concerned, that settled the matter. The listening analysts, however, were not so easily swayed.

Outlining concerns after the call, Stifel's Mark Swartzberg suggested Quincey overstated his expectations for 2018 in effort to whip his own regional heads into action. The target may ultimately not be met, but even falling short would be a good effort considering the global environment around soft drinks. 

Swartzberg continued: "We think the company's corporate evolution supports this, mainly because Quincey is fostering a willingness to fail at innovation and because managers have now had two years to adapt to more revenue (rather than volume) focused incentive structures."

Yet despite his suggestion that Coca-Cola has overextended its 2018 guidance, Swartzberg was still positive on the company's outlook. He believes Coca-Cola has a strong enough "global toolset" to beat last year's +3% organic sales increase, even without a return of its emerging market laggards. That optimism comes from Coca-Cola continuing to expand its Coca-Cola Zero Sugar launch and widening the distribution footprint of brands including Honest Tea and Smartwater. He also said that the growing number of transactions in North America were good news for a market that has seen worrying volumes declines over the past few years.

Wells Fargo analyst Bonnie Herzog was even more effusive in her praise of Coca-Cola's potential this year.

"We believe CEO Quincey's efforts to transform Coca-Cola into a total beverage company and leverage improved marketing, innovation, and execution to drive improved top-line growth remain solidly on track," she said while also highlighting improved tailwinds from new corporate tax relief.

The tax reform - signed into law by US President Donald Trump late last year - was a "a gift that keeps on giving", Herzog said. Coca-Cola investors may feel the same about Quincey. Since his appointment last year, the CEO has seemingly brought fresh purpose to his company.

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