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Coke’s Marketing Can’t Overcome Headwinds

Volume slowed in Coke’s second quarter, but we still think the firm can grow over the long-term and are sticking with our fair value estimate.


We plan to maintain our $44 fair value estimate for wide-moat  Coca-Cola (KO)   following challenging second-quarter results. Organic revenue growth of 3% was similar to first-quarter results, but the mix was much different as positive price realization and mix impact offset beverage volume growth that fell to 0% year over year. Continued emerging-market challenges, particularly in large countries such as China, look to drive the company’s top-line results short of our full-year 3.5% outlook. As such, we no longer expect recent global marketing efforts to overcome these macro challenges in the near term, and we plan to lower our full-year projection, likely in line with management’s updated forecasts for 3% organic gains.

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.

Adam Fleck does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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