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Coca-Cola expecting currency headwinds

The drinks company will reveal its first-quarter numbers on Wednesday 22 April, and foreign exchange movements will curtail its profits.

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Coca-Cola had a difficult fourth-quarter and even though cost cutting is still a priority, the company will find trading tough for a few more quarters. In the final three months of last year, the firm witnessed a 55% drop in profits, as declining sales in some of its key markets and currency headwinds took hold of the company.

Sales in the US – the company’s biggest market – helped the North American division return to growth, but a drop off in sales in Mexico still stuck out. Revenue in Europe and Asia fell by 1%, and China was an underperformer as it encountered a 3% fall in sales. The slowdown in the world’s second largest economy has led to fewer imports, and especially big name Western brands, such as Coca-Cola.

The Atlanta-based firm stated that negative movements in the currency markets accounted for a seven percent decline in operating profit, as weakness in many emerging market currencies along with a strong dollar impacted the bottom-line results. This problem is only going to get worse for Coca-Cola as the Federal Reserve looks to increase interest rates this year.

The CEO, Muhtar Kent, didn’t accept a $2.5 million bonus that he was eligible for as the firm missed its profit target for last year. Mr Kent has described 2015 as a ‘transition’ and turning down the bonus was part of ‘laying the groundwork for sustainable growth in the years ahead’.

When Coca-Cola announce its first-quarter figures, the consensus is for revenue of $10.63 billion and earnings per share (EPS) of 42 cents. The fourth-quarter numbers exceeded analysts’ estimates, and revenue was $10.87 billion and EPS came in at 44 cents, while the market was anticipating $10.74 and 42 cents respectively.

The firm will reveal its full-year numbers in February 2016, and analysts are expecting $45.2 billion and EPS of $1.97, and these forecasts represent a 1.7% drop in revenue and a 3.4% decline in EPS.

Equity analysts are bullish on Coca Cola, and out of the 32 ratings, 15 are buys, 13 are holds, and four are sells. The average target price is $44.21 which is 10% above the current price. Investment banks are very bullish on PepsiCo, and out of the 32 recommendations, 22 are buys, nine are holds, and one is a sell. The average target price is $107.86, which is 12.5% above the current price.

The number of short positions being taken out on Coca-Cola has dropped by 11% since the fourth-quarter numbers were revealed in February, and the short interest on the company is at its lowest level in 12 months.

The level currently providing support is, if that is held the 200-day moving average at $41.87 will be the initial target. If that mark is cleared then $42 will be on the radar, and then this year’s high of $44 will be brought into play. A drop below $40 will put the support at $39 in the crosshairs and if that level is punctured traders will look to $38 for support.

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