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Stock Analyst Update

Coca-Cola Meets Expectations in Fourth Quarter

Shares for the firm are slightly undervalued, but we stand by our fair value estimate.

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 Coca-Cola’s (KO) fourth-quarter results were largely in line with our expectations, with strengthening price/mix driving 3% organic revenue growth for the year, and we stand by our $44.50 fair value estimate. We were pleased to see consolidated price/mix grow 3% this year (compared with 2% last year) and expect continued price/pack management to help offset slowing carbonated soft drink sales (flat unit case volume in 2016, compared with 1% growth in 2015). Still beverages (roughly 30% of sales) experienced a 3% year-over-year increase in unit case volume, largely driven by bottled water (including double-digit growth in premium brand smartwater). Although we had forecast slightly higher operating margins for the year (21.9% versus the reported 20.6%), we expect mid-single-digit bottom-line improvement after 2017, when the firm finishes refranchising its company-owned bottling operations.

Coca-Cola’s ability to drive organic growth last year through price/pack architecture bolsters our belief in its wide moat, and we believe this strategy will allow for further value gains in both developed and developing markets. In developed markets, the firm has been able to revive its carbonated soft drink portfolio by emphasizing smaller pack sizes and reduced-sugar colas (Diet Coke, Coke Light, Coke Zero), all of which have fewer calories per serving than traditional soft drinks. This strategy has proved successful, with sugar-free cola sales in the U.S. outpacing growth in the overall sparkling portfolio. In developing markets like Brazil, where macroeconomic challenges have dampened volume growth, the firm has been able to market more affordable beverage packs that should help stabilize volume declines without weighing on gross margins. Still, we don’t expect annual price/mix contributions of the same magnitude (13%) to persist the next few years without impacting unit case volumes, which declined 1% last year, and stand by our modest 2% Latin American volume growth forecast.

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Sonia Vora does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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