Coca-Cola's Profitability Strengthens
We're planning to increase to our fair value estimate for the wide-moat firm.
We're maintaining our long-term outlook for wide-moat Coca-Cola, (KO) which calls for mid-single-digit revenue growth and gross margin in the mid-60s (versus 62.6% in 2017) after 2018, once structural headwinds related to the firm’s bottler refranchising subside. During the fourth quarter, organic sales grew 6% (two thirds of which was driven by price/mix) and gross margin expanded 550 basis points to 64.2%. We plan a modest increase to our $46.50 fair value estimate due to the impact of recently enacted U.S. corporate tax reform. While shares remain a touch undervalued, we’d suggest investors aiming to build a position in the nonalcoholic beverage space look to wide-moat Pepsi for a more favorable entry point, with shares trading at a 10% discount to our valuation.
Coca-Cola has made substantial strides toward a less capital-intensive operating model over the course of the year, with its U.S. bottling system now fully refranchised. We remain optimistic about the impact of the firm’s bottler refranchising and subsequent shift toward an asset-light model on its profitability, as evidenced the impressive gross margin expansion seen during the quarter. From our vantage point, Coca-Cola’s strong relationships with its bottlers have allowed it to better understand of local market dynamics and remain attuned to consumer preferences. In this vein, we appreciate the firm’s efforts to tailor its fare to regional trends in China (adapting price/pack to accommodate online ordering) and the Europe, Middle East, and Africa segment (focusing on small baskets and pack sizes).
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.
Sonia Vora does not own 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.