Coke’s Marketing Can’t Overcome Headwinds

We plan to maintain our $44 fair value estimate for wide-moat

Nonetheless, we still believe that Coke can grow its revenue about 5% annually over the long term, driven by renewed emerging market growth rates (as rising incomes lead to increasing per capita nonalcoholic beverage consumption) and continued rational pricing between the company and its competitors in developed economies. As evidence of the latter effect, Coke’s North American 2% positive price/mix in the quarter tracked alongside PepsiCo’s 1% increase and Dr Pepper Snapple’s roughly 3% contribution.

Coke also remains on track to meet our full-year profitability outlook, though the improvement seen this quarter stemmed primarily from positive mix shift toward higher-margin developed markets rather than comparable improvement. Only the company’s Latin America and Asia-Pacific segments saw improving operating margins, while increased marketing efforts drove declines in North America and Europe. That said, we continue to believe the firm will enjoy about 40 basis points of consolidated margin improvement for the full year (similar to year-to-date performance) to 23.8%, and that profitability can further climb over the medium term because of ongoing productivity initiatives and renewed volume growth (particularly in noncarbonated beverages).

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