Coca-Cola Earnings: Resilient Volume Buttressed by Innovation and In-Market Execution

Coca-Cola Company Stock at a Glance

• Fair Value Estimate: $58.00
• Morningstar Rating: 2 stars
• Morningstar Uncertainty Rating: Low
• Morningstar Economic Moat Rating: Wide

Coca-Cola Company Earnings Update

We plan to raise our $58 fair value estimate for the Coca-Cola Company KO by a low-single-digit percentage after digesting its better-than-expected second-quarter results, which were driven by beverage innovations and in-market execution in both premium and value offerings globally. Organic revenues grew 11% and adjusted earnings per share were up 17% (excluding currency impact), both ahead of our estimates of 10% and 14%, respectively.

Coke nudged up its 2023 guidance for organic revenue to 8%-9% (from 7%-8%) and adjusted EPS growth to 5%-6% (from 4%-5%), which we view as achievable. We plan to update our own 2023 estimates to approximate the new outlook. Our 10-year projections for mid-single-digit sales growth and low-30s average operating margins remain in place. Shares are trading in a range we consider fairly valued.

Key topline growth drivers are consumer-centric innovations, including refreshed Minute Maid juice offerings and alcoholic ready-to-drink beverages under the Jack & Coke and Schweppes brands, as well as astute in-market executions with products and prices tailored to different channels and regions. Bottlers’ digital investments to connect 6.5 million traditional retailers in the year to date also helped unlock new volumes.

As such, despite a 10% price mix increase (consistent with pricing reported by wide-moat peer PepsiCo PEP), volumes were flat even as consumers tightened their purse strings. We anticipate limited new price hikes in the coming quarters as cost inflation eases (mid-single-digit increases in the commodity basket for 2023). While management acknowledged a slight uptick in promotions, we think the soft drink aisle remains rational and believe Coke is well-positioned with its dual-pronged strategies on premium and value products. We expect Coke to plow more in brand investments to stay connected to consumers, with such spending at 11% of sales in 2023 (versus 10% in 2022), to reinforce the brand intangibles that are core to Coke’s long-term competitive standing.