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This company is about to report weak earnings: Pro

Monday, 14 Oct 2013 | 1:55 PM ET
Jim Scherer | StockFood Creative | Getty Images

Coca-Cola will report earnings on Tuesday morning before the open, and the company is expected to show modest earnings growth up to $0.53 and a small decline in revenues. 2013 has been a tough year for Coke, with the stock up just 4 percent versus the S&P 500's gain of 19 percent. However, one options trader expressed confidence in the stock by selling 5,000 May 33-strike puts for $0.67.

This trade commits the trader to buy 500,000 shares for $32.33, or 14 percent lower, should the stock trade below $33 at May expiration. If Coke shares are above $33 come May, these options will expire worthless, and the trader will keep the $0.67 premium, which is a 3.5 percent annualized return on capital.

In Tuesday's earnings report, investors will be closely watching sales volumes, which have been in decline for several years in developed markets like North America. Investors are still optimistic that there is room for growth in emerging markets. In response to changing tastes and increasing health consciousness, Coke has introduced smaller serving portions and has been focused on building its portfolio of waters, juices, and teas to make up for declining soda sales.

(Read more: Dark (but familiar) clouds float above earnings season)

Options Action: Coke vs. Pepsi
Brian Stutland of Stutland Volatility Group, looks at how options traders are betting on Coke and PepsiCo. "Coke and PepsiCo are overvalued," he says.

Coke's stock price has also been under pressure this year due to rising interest rates. Coca-Cola's dividend has attracted yield-seeking investors, but as interest rates have risen, its dividend yield has become less attractive. Unfortunately for Coke, interest rates are likely to continue moving higher, and demand for sugar drinks in developed markets is likely to continue to slowly fizzle, which means the long-term prospects for Coke are meager at best.

And the bad news doesn't end there. For the past 12 years, Coke has been ranked the number one most valuable brand in the world by the brand consulting company Interbrand, but this year it was downgraded to third. Apple took the top spot, and Google came in second. While third place isn't bad, the downgrade is representative of slowing demand for soda around the world.

(Read more: Why this could be an awful week for earnings)

With all this in mind, I would pass on Coke right here in favor of a competitor like Pepsi, which has a strong snack portfolio. While we can debate their relative health merits, salty snacks do offer more room for growth than sugary beverages. That's why I'm expecting much better earnings out of PepsiCo on Wednesday than I am from Coke on Tuesday.

Still, unless things get much worse for Coca-Cola, this options trader is pretty likely to make money on the trade.

Disclosures: Stutland owns shares of PepsiCo.

Brian Stutland is managing member of Stutland Equities and a contributor to CNBC's "Options Action." Follow him on Twitter @BrianStutland.

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