Option Trade 
The Coca-Cola Co (NYSE:KO) Calls
 Tuesday, 26th July, 2016

** OPTION TRADE: Buy the KO SEPT16 2016 45.000 call at approximately $1.25. Place a pre-determined sell at $2.50.

Note: No protective stop losses added -- but if you wish to do so make it $0.50.

by Ian Harvey

July 26, 2016

The Coca-Cola Co (NYSE: KO), a marketer, producer and distributer of nonalcoholic beverages, is scheduled to report its second-quarter results before the market open on July 27. Analysts forecast earnings of $0.58 per share, down from $0.63 during the same period last year.

Last quarter, the company delivered a positive earnings surprise of 2.27%. In fact, the cola giant surpassed earnings estimates in each of the past four quarters with an average surprise of 2.99%.

Coca-Cola has done a decent job navigating a tough market, but earnings have been falling, and are expected to do so once again for the company’s second-quarter. A shift away from sugary soft-drinks in the U.S. has hurt the company, but it has managed to partially offset the impact by growing other business segments. While earnings have been on the decline, the company has been able to top analyst estimates for each of the last six quarters and better than expected revenue the last two quarters.

The company recently announced that it would be expanding its beverage products, entering the milk and coffee markets in Brazil. Coca-Cola is purchasing dairy producer Laticinios Verde Campo and partnering with coffee exporter Tristao Companhia de Comercio Exterior, both in Brazil, for undisclosed sums.

Coca-Cola said coffee and milk "were the last two frontiers in the beverage sector."

Coca-Cola’s aggressive cost-cutting and strategic initiatives led to better-than-expected results in the first quarter amid a heightened global volatility and macro headwinds. Increase in the company’s marketing investments supported better volume growth, especially in North America. We expect to see similar trends continuing in North America in the yet-to-be reported quarter as well.

Also, pricing gains, cost cuts and productivity savings should continue to support the bottom line.

However, bear in mind that unfavorable currency impact and lower volumes of carbonated soft drinks due to a declining demand will continue to hurt the top line.

The stock has been stuck in a sideways trend over the last three months, but remains up 6.2% on the year – which leads us to believe that it is time for a breakout to the positive side with a solid report.

The stock has a market cap of $18.24 billion and a P/E ratio of 25.95. The stock has a 50-day moving average price of $37.06 and a 200-day moving average price of $46.68. Coca-Cola Enterprises has a 52-week low of $33.67 and a 52-week high of $54.54.

Coca-Cola and its peers are implementing several productivity initiatives to mitigate the impact of a volatile macro environment and softness in soda volumes. Its productivity initiatives involve the restructuring of its global supply chain, implementation of zero-based budgeting, and streamlining and simplifying the company’s operating model. It’s also working to increase discipline and efficiency in its direct marketing investments.

Coca-Cola expects to generate more than $600 million in productivity savings in fiscal 2016. The company aims to generate total annualized productivity savings of about $3.6 billion by 2019. It would redirect these productivity savings to marketing efforts and innovation to boost revenue.

On July 20, 2016, Coca-Cola Brazil announced the launch of Café Leão, a high-quality, locally sourced and locally produced coffee that will be sold exclusively in Brazil. After the initial launch of Café Leão in Rio de Janeiro, São Paulo, and Curitiba, the company plans to expand it across Brazil starting in January 2017. The company also plans to offer Café Leão to Brazilian consumers on e-commerce channels effective September 2016.

In June 2016, Coca-Cola purchased a minority stake in Aloe Gloe, an aloe water beverage. Aloe Gloe is a certified organic, non-GMO (genetically modified organism), gluten-free drink.

In March 2016, Coca-Cola acquired Xiamen Culiangwang, a producer of plant-based protein drinks sold in China. Xiamen Culiangwang sells products under the brand China Green Culiangwang.

In January 2016, Coca-Cola acquired a minority stake in Chi Limited, Nigeria’s leading juice and value-added dairy company. In August 2015, Coca-Cola bought a ~30% stake in Suja Juice, a California-based manufacturer of organic juices, that uses a technology called high-pressure processing to preserve nutrition and taste.

Coca-Cola’s strategic acquisitions in still beverage brands will help it address the growing consumer demand for better beverage options.

TheStreet Ratings rated this stock as a "buy" with a ratings score of A-.

The company's strengths can be seen in multiple areas, such as its notable return on equity, solid stock price performance and expanding profit margins. TheStreet Ratings feels its strengths outweigh the fact that the company has had generally high debt management risk by most measures that TheStreet Ratings evaluated.

Also, Coca-Cola Enterprises Inc was upgraded by equities research analysts at Societe Generale from a “hold” rating to a “buy” rating in a note issued to investors last Tuesday.

Also, several other equities research analysts have recently commented on the company.

• Susquehanna restated a “hold” rating on shares of Coca-Cola Enterprises in a research note on Sunday. Evercore ISI restated a “buy” rating on shares of Coca-Cola Enterprises in a research note on Sunday, June 26th.

• Vetr upgraded shares of Coca-Cola Enterprises from a “hold” rating to a “strong-buy” rating and set a $55.50 price target on the stock in a research note on Tuesday, May 31st.

• Finally, Stifel Nicolaus initiated coverage on shares of Coca-Cola Enterprises in a research note on Wednesday, June 1st. They issued a “buy” rating on the stock.

Two research analysts have rated the stock with a sell rating, ten have given a hold rating, seven have issued a buy rating and one has given a strong buy rating to the company. The company presently has a consensus rating of “Hold” and a consensus price target of $51.78.

Harvey’s Options Volatility Indicator


KO has been stuck in a sideways pattern since the start of May, partially due to a P/E of 27.5. A solid report should send the stock higher, and possibly drive shares above the 52-week high.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the KO SEPT16 2016 45.000 call at approximately $1.25. Place a pre-determined sell at $2.50.

Note: No protective stop losses added -- but if you wish to do so make it $0.50.

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