Coca-Cola Boasts Strong Start; Shares Inflated

Evidencing its pricing power, Coca-Cola’s KO fourth-quarter results featured impressive 18% organic sales growth (with a 7% benefit from price/mix and 11% from concentrate), particularly when viewed against the 6% gains posted a year ago. Even as mobility restrictions (to stem the spread of COVID-19) plagued its operations in China (with an unquantified volume decline for the quarter), these constraints weren’t broad based, as management suggested both at-home and away-from-home volumes grew in the quarter on a consolidated basis (unquantified). Although the economic backdrop remains quite volatile, we think the firm is poised to withstand the onslaught due to its vast troves of global consumer insights, which should enable it to tailor its mix to evolving trends on a local level.

Inflation remains a challenge, though, and we expect higher costs (in labor, transportation, and ingredients like high fructose corn syrup) will persist for the next several quarters. Even as management anticipates a mid-single-digit jump in commodity costs this year, we expect the firm will pull several levers to numb the drag to profits—raising prices, altering price/packs, and extracting inefficiencies. Further, we’re encouraged Coca-Cola continues to funnel resources to research, development, and marketing to maintain its competitive prowess, versus preserving near-term profits. We view this spend as a prudent means to support the intangible assets that underpin its wide moat.

Management held the line on its fiscal 2022 targets—7%-8% organic sales growth and 8%-10% adjusted EPS growth—which we continue to view as attainable. While we may edge down our near-term profit outlook and $59 fair value estimate, we don’t intend to alter our long-term forecast (mid-single-digit annual sales growth and operating margins holding in the low-30s). Shares trade at a 10% premium to our intrinsic valuation, and we’d suggest investors remain on the sidelines.

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.