Stock of the day 21/07/2015 – The Coca-Cola Co/McDonald’s Corp

It’s that time of year again when we check in with the aging gatekeepers of the globe’s junk-food kingdom, as Coca-Cola and McDonald’s announce their second quarter results this week.

First up on Wednesday is Coca-Cola, the soft-drinks giant with an increasingly flabby centre. After opening 2015 at $42.29, the company had quickly hit a 2015 high of $43.82 towards the end of January; however, whilst it almost touched this peak once again at the end of February, it was to be a price Coca-Cola looked upon wistfully as the year continued. A dismal start to March saw the stock fall from $43.31 to $39.62 across 13 days of trading, despite the announcement of a new marketing strategy designed to reinforce the idea that original Coca-Cola, Diet Coke, Coke Zero and Coke Life at all part of a single brand.


(Source: IT-Finance.com 21/07/2015)

Since this precipitous fall Coca-Cola has struggled to break above $41.50, spending most of the last 4 months struck in a narrow $1.50 trading band. The stock actually tumbled to an 11 month low of $39.13 by the end of June, only to recover to a current trading price of $41.39 (IT-Finance.com, 21/07/2015) across July.

In the face of growing sales pressures as customers seek healthier alternatives to the company’s sugar-heavy products, Coca-Cola managed to produce a set of first quarter results that somewhat exceeded expectations. Despite the curse of dollar strength, Coke managed to eke out a small 1% increase in net revenue to $10.71 billion, whilst profits fell by 4% to $1.6 billion, which in itself was a mild improvement, giving investors some evidence that the company’s ‘long-term growth plan’ is working.

Despite declining sales Coca-Cola’s main rival PepsiCo managed to beat expectations back at the start of June, so the pressure is own for Coke to do the same. The currency headwinds, so harmful to Coca-Cola’s huge international presence, are expected to be present once again, and the company will continue to battle the 10 year soda sale decline in the US. The progress of its healthier products should be something investors keep their eye on, as well as Coke’s developments in its emerging markets. Analysts are forecasting earnings per share of $0.60 alongside revenue of $12.08 billion, leaving Coca-Cola with a consensus rating of ‘buy’ with an average target price of $44.99.

So far in 2015 McDonald’s has fairly slightly better than its soft drink equivalent, managing to recover a fair portion of the losses it saw in the second half of 2014. However, it is still facing a set of rather unenviable challenges in the next few years; the company announces its second quarter results on Thursday. The fast-food giant managed to recover from a disastrous January, which saw the company sink to $88.78 by the end of the month from a 2015 starting price of $94.12, to cross $100 for the first time since last July by the start of March. However since then the stock has been ping-ponging inside a $95 to $99 trading bracket; it has a current trading price of $97.49 (IT-Finance.com, 21/07/2015).


(Source: IT-Finance.com 21/07/2015)

Despite causing a 3% bump on the markets, McDonald’s first quarter results towards the end of April were hardly the stuff dreams are made of. The company saw its sixth successive quarter of declining same store US sales, tumbling by a worse than expected 2.6%, whilst the global sales figure fell by a similarly dismal 2.3%. To top it off, net income fell 33% to $811.5 million alongside an 11% drop in revenue to $5.96 billion.

Yet it managed to forestall any great market drop because of the promise of a ‘turnaround’ plan from CEO Steve Easterbrook. This plan includes cutting net costs by $300 million, mass-refranchising, closing more stores in the US this year than it opens and most interestingly the splitting of the company into 4 regions: 1) the USA, 2) pre-established markets such as Canada and the UK, 3) high-growth markets such as China and Russia, and 4) everywhere else.

This all sounds well and good, but investors will now be looking for any actual evidence that this plan is working, however embryonic that evidence is. In terms of McDonald’s actual products, the turnaround plan is slightly more muddled; it includes the seemingly contradictory directions of simplifying the menu yet also letting diners customise their burgers AND selling the always-popular breakfast menu all day as well as trying to push their healthier wares. The current McDonald’s method has the air of ‘let’s see what sticks’ about it and analysts don’t have high expectations for Q2, with a consensus rating of ‘hold’ with an average target price of $100.18.