Coca-Cola Earnings: Focus on Volume Expansion Good for Long-Term Sales and Profit Growth

Key Morningstar Metrics for Coca-Cola

• Fair Value Estimate: $60.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

What We Thought of Coca-Cola’s Earnings

We don’t plan any material changes to our $60 fair value estimate for Coca-Cola KO after digesting its 2023 results, as its sales growth of 6% and adjusted earnings of $2.69 per share matched our estimates. Despite a softening consumer backdrop and intense competition in the beverage aisle, we think the firm remains well-positioned to capture growth in the coming years, thanks to heavy investments in innovations and brands, as well as deft in-market executions that assert its competitive standing globally.

For 2024, we view management’s outlook for mid-single-digit sales growth as reasonable after adjusting for the impact of refranchising, but we plan to trim our adjusted EPS estimate by a low-single-digit percentage due to worse-than-expected near-term currency headwinds. Our 10-year projections for mid-single-digit sales growth and low-30s average operating margins remain in place.

Impressively, Coke delivered organic revenue growth of 12% in 2023 based on a broad-based, 2% beverage volume expansion, better than the 1% contraction at PepsiCo PEP. We attribute the volume resilience to the firm’s consumer-valued innovations in ingredients, formulas, and packaging, as well as smart digital marketing that resonates with consumers globally.

Dynamic region-specific pricing and agile channel strategies have helped Coke preserve its value proposition amid macro and geopolitical challenges. Adjusted operating margins expanded 40 basis points to 29.1% thanks to easing input cost inflation and better expense leverage, keeping the firm on track to increase this metric to 30% by 2026, according to our projection.

For 2024, we expect a more balanced price/volume mix, with a 2% volume growth forecast consistent with the average pace of expansion over the past five years, in addition to a 3% price hike that we view as realistic, given management’s comments that pricing in most markets (except Argentina and parts of the Middle East) normalized in the December quarter.