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

Key Morningstar Metrics for Coca-Cola

• Fair Value Estimate: $60.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

What We Thought of Coca-Cola’s Earnings

We plan to maintain our $60 fair value estimate for Coca-Cola KO after digesting the company’s third-quarter results, which were slightly better than expected, driven by beverage innovations, brand investments, and deft in-market execution. Organic revenue grew 11%, edging our 10% estimate, while adjusted earnings per share growth of 7% matched our expectations.

Coke nudged up its 2023 guidance ranges for organic revenue to 10%-11% (from 9%-10%) and adjusted EPS growth to 7%-8% (from 5%-6%). We view this 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 consider buying this name.

Despite a 9% price increase in the quarter (10% in the 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, as well as 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 on track to further shrink its bottling footprint and achieve better margins and capital efficiency.