Analysts Dive In on Two Consumer Giants: The Coca-Cola Co (KO), McDonald’s Corporation (MCD)

Wall Street analysts dived in on beverage giant The Coca-Cola Co (NYSE:KO) and fast food giant McDonald’s Corporation (NYSE:MCD). The analysts reflect on Coca-Cola’s recent 8-K release, and McDonald’s refranchising strategy. Let’s take a closer look.

The Coca-Cola Co The Coca-Cola Co

As Coca-Cola released its 8-K last week, analyst Stephen Powers of UBS found key points which urged him to revise his estimates and raise his price target on the stock. The 8-k included several details about the future of Coca Cola’s cost saving benefits, the state of the company’s North American bottling operations, and the overall margins. Powers reiterates a Buy rating and increases the price target by 6% from $49.00 to $52.00.

Powers begins by presenting three main points that drive his estimations upwards. He states, “(1) higher-than-expected (if still suboptimal) base KO-N. America margins of ~26% vs. ~23% previously forecasted, (2) more favorable FX (now only a -1.5% top-line headwind in FY16 vs. a -4.0% headwind previously forecasted), and (3) greater cost savings given $300M+ in apparent stranded costs within legacy CCR that were not included in KO’s stated $3B cost savings target.” However the analyst also places a caveat, stating, “We note, however, that given KO’s anticipated hedged positions on FX and the timing of stranded cost removals, we do not expect the majority of these benefits to flow through KO’s income statement until FY18.” He continues, “Accordingly, our FY16, FY17, and FY18 EPS estimates rise 1%, 1%, and 6%, respectively (to $1.98, $2.08, and $2.31—each ahead of consensus).”

Powers highlights a sensitive point for the company, namely its cost saving efforts which will benefit the company through the next few years. The analyst explains, “KO’s release from last week give rise to valid questions regarding the health of the KO system in North America. Specifically, implied CCR bottler operating margins in 2015 were only ~2.2% (hardly sustainable).” Powers stresses that this is a temporary burden. He comments, “Based on conversations with KO, these margins were likely suppressed by 200+ bps of stranded overheads, and going forward should benefit from ~$500M in savings that will accrue to refranchised assets (another ~300 bps).”

According to TipRanks, 61% of Stephen Powers’ predictions are profitable, the analyst delivers an average return of 0% per recommendation.

Among Powers, in the past three months, 4 other analysts gave the company a Buy rating, and two remained on the sidelines. All 12-month price targets amount to an average of $48.86, marking a 4.67% upside from current levels. 

McDonald’s Corporation

McDonald’s strategic map is on the table as the company intends to refranchise Hong Kong, Korea, and China. Analyst John Glass of Morgan Stanley is surprised to see China being re-franchised almost completely though such a move seems favorable to the analyst. 

Korea and Hong Kong are relatively small (672 stores overall), says the analyst, and refranchising such markets doesn’t impact MCD too much, yet he is surprised regarding a complete refranchising of its Chinese market. He explains, “China is different, with 2,200 stores and growing units about a 10% clip and virtually open ended growth. While the Chinese market has become more challenging in the last few years due to a supplier issue and new competition, this had been identified as a key growth market for MCD.” The analyst believes such a move will significantly lower operating profits in exchange for royalties. Glass cites an approximation of $250M based on historical information.

The analyst does not believe that in this case, refranchising will result in decreased expenses. He explains, “We estimate that these markets together have annual capex of ~$300-350 M, so the impact would be to further lower MCD’s $1.8 B in capex (’15), though the US remodeling efforts may temporarily increase and therefore this reduction may not be felt immediately, but is favorable for the long term capital intensity of the business.”

Glass reiterates an Equal-weight rating on the stock with a $118 price target.

According to TipRanks, 61% of John Glass’ predictions are profitable, overall delivering an average return of 9.9%. Six other analysts stick with Glass on the sidelines, while twelve analysts gave the stock a Buy rating. The 12-month price targets amount to an average of $130.14 which is a 2% upside from current levels.


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