Coca-Cola Earnings Show a Solid Q3 on Strong Pricing Despite Headwinds

Coca-Cola Stock at a Glance

• Current Morningstar Fair Value Estimate: $58
• Coca-Cola Stock Star Rating: 3 Stars
• Economic Moat Rating: Wide
• Moat Trend Rating: Stable

Coca-Cola Earnings Update

We plan to maintain our $58 fair value estimate on wide-moat Coca-Cola’s (KO) shares after wading through third-quarter results which reaffirmed our constructive view on the strength of its beverage portfolio. Shares trade near our valuation, and as such, we think investors should refrain from building a position.

In the quarter, Coke showcased strong pricing power and agile revenue growth management in a volatile environment. The company reaped the benefits of smart digital marketing and proactive mix management, delivering 16% organic sales growth. While volume growth held (up 4%) despite significant price increases (up 12%), we see limited room to raise prices further in coming quarters as the macro outlook darkens in the U.S. and Europe (which combine for about 51% of total sales). Even against this, broad-based expansion across the core sparkling category (up 3%) and nonsparkling categories including water, energy drinks, coffee, and tea (up 5%) was encouraging, lending support to our view that Coke’s diversified beverage portfolio is advantaged, supported by investments in innovation and marketing.

Coke’s top-line trajectory in the quarter looked stellar, but profit growth was muted as cost pressure from raw materials, packaging, and logistics took a toll (consistent with food and beverage peers), driving its operating margin down 100 basis points year over year to 27.9%. We see little relief on the cost front, especially as the firm is committed to more consumer-facing marketing investment around major events such as the upcoming FIFA World Cup and an expanding innovation pipeline (over half of which in the nonsparkling categories). Despite the near-term profit hit, we think these investments will bolster the Coke brand’s intangible asset.

As inflationary angst persists, we do plan to nudge our 2023 EPS forecast down by a low-single-digit percentage. However, our long-term outlook of mid-single-digit percentage growth in sales and profits is unchanged.