Coca-Cola's Results Highlight Positive Trajectory
We will likely raise our $44 fair value estimate slightly, but shares still look fairly valued today.
Wide-moat Coca-Cola’s (KO) third-quarter results were in-line with our expectations, and we don’t plan to make substantial changes to our long-term assumptions. The firm also maintained its full-year revenue and earnings outlooks, which bracket our own estimates. We will likely raise our $44 fair value estimate slightly for the time value of money since our last update, but overall we believe the stock is appropriately priced, given our outlook for the company.
Global volume growth ticked up to 1% year over year in the period from flat in the second quarter, and remains on track to meet our full-year 1% outlook. Noncarbonated beverages again outpaced sparkling volumes in the quarter, and we expect this secular trend to continue beyond this year. That said, Coke holds decent exposure to the noncarbonated end market (roughly 27% of global systemwide volume in 2015), and we think further product launches in this space will help the firm’s long-run volume rise at about 2% annually.
We’re also encouraged by the soft-drink industry’s continued rational pricing. Coke’s price and mix have together added about 2 points to growth in the first three quarters of the year, in line with our estimate for 2016, and we expect the company’s brand intangible assets to allow for continued low-single-digit contribution. North America in particular remains solid, as Coca-Cola’s net revenue per case increased 2%, echoing Pepsi’s recently reported 1% metric for the quarter.
Coke’s cost control remains solid as well, with adjusted currency-neutral operating margins expanding more than 50 basis points to 24.2% in the quarter, while adjusted margins (including currency) climbed to 24.6% in the first nine months of the year, compared with 24.4% over the same period in 2015. We still expect that further productivity actions, combined with the positive mix from shedding lower-margin bottling assets, will lead to adjusted margins climbing to north of 30% by the end of the decade.
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.
Adam Fleck 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.