Coca-Cola Earnings: Innovation and Brand Investment Buoyed Sales Expansion; Shares Undervalued

We plan to maintain our $60 fair value estimate for wide-moat Coca Cola KO after digesting slightly-better-than expected third-quarter results, driven by beverage innovations, brand investments and deft in-market execution. Organic revenue grew 11%, edging our 10% estimate while adjusted EPS growth of 7% matched our expectation. Coke nudged up 2023 organic revenue and adjusted EPS growth guidance ranges to 10%-11% (from 9%-10%) and 7%-8% (from 5%-6%), which we view as achievable, and we are tweaking our own 2023 estimates to align with the improved outlook. Our 10-year projections for mid-single-digit sales growth and low 30s average operating margins remain in place. After a 3% intra-day price pop, shares still trade at a 10% discount to our intrinsic valuation and we suggest long-term investors to consider buying this name.

Despite a 9% price increase in the quarter (10% year to date), volume (up 2%) held up well, which we attribute to consumer-centric innovations (in recipes, ingredients, and packaging), sharper brand investments (60% digital) that resonate with consumers, and astute in-market execution (including region-specific pricing and marketing events, and cooler and in-store display investments in emerging markets). Management highlighted its priority in preserving volume growth (even in hyperinflationary markets such as Argentina and Turkey), indicating a clear focus on value proposition for the longer term, which we view as prudent. On profitability, adjusted operating margins expanded 20 basis points to 29.7% mainly due to expense leverage and a margin boost from refranchising in Cambodia and Vietnam in 2022. With another refranchising (in the Philippines) scheduled in the next six months, we think Coke is well on track to further shrink its own bottling footprint and achieve better margins and capital efficiency.