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Stock Analyst Update

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).

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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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