Coca-Cola's Results Highlight Positive Trajectory

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.

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