Coke Reports Blowout Quarter; Shares Fairly Valued
We plan to raise our fair value estimate to reflect time value and increased guidance.
Wide-moat Coca-Cola’s (KO) stock had started to crescendo in the weeks leading up to its second-quarter earnings report, suggesting that investors had finally shrugged off the issues (like its tax dispute with the IRS) that had undermined its valuation earlier in the year. To provide grist for the bulls’ theses, the firm reported a knockout quarter, with sales and earnings ahead of FactSet consensus. While the comps the firm faced were undoubtedly soft, commercial momentum and management’s increasing visibility into the contours of the economic recovery manifested in increased top-line guidance for the year (12%-14% organic growth versus high single digits previously). We plan to raise our fair value estimate to $58 from $55 to reflect time value and increased guidance, partially offset by higher taxes as we incorporate Morningstar’s probability-weighted expectation that the U.S. statutory rate will rise to 26%. This does not contemplate structural changes that could ensue from Coca-Cola’s current tax litigation, but our view remains that this situation will take a while to resolve, and the worst possible outcome is unlikely. With shares rallying and risks appearing balanced, we don’t see a compelling margin of safety currently.
Revenue of $10.13 billion was up almost 42% (37% organically), driven by 26% growth in concentrate sales as the firm cycled the pandemic trough of 2020. More impressively, sales were ahead of 2019 levels even as many important markets (like India and Japan) remain under pandemic restrictions. The firm gained value share in aggregate, but we took note of share losses in the profitable Latin America region. Share challenges in countries like Mexico could portend a precarious competitive landscape ahead—with vaccine distribution tempered across the region and the coronavirus continuing to linger, macros and per capita incomes could remain challenged, making for an environment more susceptible to irrational competition.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Nicholas Johnson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.