By Pinchas Cohen
The Coca-Cola Company (NYSE:KO) is scheduled to report its second-quarter earnings on Wednesday before the bell. Fundamentally, there are three key components expected to affect the beverage manufacturing giant's earnings: the consumer shift to healthier products, refranchising and US dollar weakness.
Can Coke Shift Its Businesses?
Cigarettes may have looked cool when Clint Eastwood smoked them in The Good, the Bad and the Ugly, back in 1966, but today they’re just ugly. A similar trend is occurring today with sugary beverages. Understandably, this shift in preferences has sent beverage companies scrambling to create healthy alternatives with which to keep their business afloat.
Accordingly, the focus of Coca Cola commercials has turned away from the original Coke to the company's dietetic alternatives. However, what may get more publicity than the trend shift is a lawsuit filed earlier this year in California by non-profit Praxis Project, that's reminiscent of the lawsuits brought against the cigarette industry. The soda manufacturer is being sued for alleged misleading and false marketing of its sugary drinks, so much so that the suit blames the beverage industry for such growing public health problems as obesity and diabetes.
The company’s net sales overall have also taken a dive during the last few quarters after it underwent structural changes. The current strategy is to move away from the low-margin business of distribution toward increased pricing of product and refranchising of its US territories by the end of 2017, in order to reach a more favorable revenue mix.
In 2016, Coca Cola it improved its operational performance by 90 basis points YoY up 20.6 percent. While this may help the company’s long-term growth, it is expected to create an almost 20 percent decline in revenue.
The Silver Lining Of Dollar Weakness
At the end of 2016, the dollar reached a 13-year high, which hurt Coca Cola sales overseas. Since then the dollar has declined by 10 percent to reach a 13-month low. This should offset some of the company’s negative headwinds during tomorrow's earnings report.
The company's stock price reached a high of $46.06 on June 6. The next peak, on June 20, was lower at $45.87. The following trough led the price below its uptrend line since February 14, with a lower price than its previous $44.80 trough on June 13. This established a series of lower peaks and troughs, a downtrend within a falling channel. The rally from the July 11 low of $44.15 has been kept on a leash by the 50 dma, which has been weighing on it.
Another indication that the current rally is merely a correction within a falling trend is the On-Balance Volume. The OBV is considered the indicator that underscores the difference between "smart money" (institutions) and “dumb money” (retail traders). Note that while the price rallied, the OBV remained flat, suggesting the rally is being driven by the investing public, rather than the smart money.
Target Price
The first target price would retest the support of the $44.15 July 11 low, before it continues down toward the 100 dma, currently at $43.80. Note how it rushed to protect the bottom of the channel.
Trading Strategies
Conservative traders may wait on a short for a full correction to the channel top, at $45.40.
Moderate traders may wait on a short for a correction to the $45 round-number psychological resistance.
Aggressive traders may wait for a correction to the resistance of the Bearish Piercing pattern, with Friday’s green candle and yesterday’s red candle – at $45.07.
Very Aggressive traders may short right now.