What Coca-Cola and McDonalds Recent Earnings Reveal About the Health of Their Businesses

Earnings: Coke Misses the mark Analysts were looking for second-quarter earnings of $0.63 per share. Wall Street hoped for revenue of $12.8 billion. Coke delivered EPS of $0.58, on revenue of $12.5 billion in the quarter. Coke missed on both the top and bottom lines. Source: Coca-Cola Company.

Reasons not to worry despite, declining revenue A deeper look reveals that year-over-year revenue declines were primarily caused by currency setbacks and structural changes within the company, rather than problems with the business fundamentals. These structural changes related to Cokes refranchised bottling operations should deliver increased value for the company down the road. Coke gained market share in international markets, with sparkling volume and Coca-Cola volume accelerated in North America, Eurasia and Africa, Europe and Asia Pacific in the quarter. 9% volume growth in China was also encouraging.

More positives from Cokes earnings The company returned $1.3 billion in cash to its shareholders in the second quarter. Management plans to repurchase between $2.5 and $3 billion by years end. Volume growth lifted gross margins to 61.7% from 60.9% a year ago, according to data from Morningstar.

Margins should improve Cokes management said it expects operating income growth to be stronger in the second half of the year. Additionally, Cokes chief financial officer said investors should expect some margin expansion in the quarters ahead as the company locks in significant cost savings. Source: Coca-Cola.

A strong balance sheet In addition to the points made on the previous slides, investors shouldnt overlook Coca-Colas strong balance sheet. Coke currently boasts a debt to equity ratio of 1, which means that debt holders only have 1 times more claim on assets than Cokes shareholders. Thanks to its stellar financial position, Coke is on track to repurchase $800 million shares this year.

Earnings: McDonalds also missed the mark Analysts were looking for EPS of $1.44 in the second quarter. Wall Street was expecting revenue of $7.29 billion in the period. McDonalds posted a profit of $1.40 per share, on revenue of $7.1 billion in the period. Earnings increased 1% but missed analysts estimates.

Missed earnings are only part of the picture A deeper look reveals that many of McDonalds fundamentals are still intact. The companys profit margins continued to expand in the quarter, with operating margins of 30.5%, though management expects margins to be crimped in the quarters ahead. McDonalds balance sheet still looks good with low debt. As one of the most recognizable brands in the world, McDonalds continues to generate strong cash flow.

Investing in its business at the ground level Despite recent setbacks, McDonalds continues to heavily invest in its business. McDonalds opened 461 new restaurants in the second quarter. The fast-food giant now plans to open 1,500 to 1,600 new stores and re-image over 1,000 existing locations in 2014. Source: McDonalds

Unfortunately, margins will remain crimped Unlike Coke, McDonalds management was less optimistic about margins in the back half of the year. Peter Bensen, McDonalds CFO said, we expect continued pressure on consolidated company operated margins in the second half. Higher labor costs in the U.S. should also pressure margins in the quarters to come.

What it all means Shares of both Coca-Cola and McDonalds suffered after their respective earnings reports this week. However, Coke looks better positioned for a rebound in the quarters to come thanks to steadily improving margins and meaningful share buybacks that should create shareholder value going forward. McDonalds, on the other hand, could continue to suffer in the near-term as it struggles with shrinking margins and increased costs.

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