Coca-Cola's Organic Growth Prospects Remain Strong

Coca-Cola's KO full-year results largely met our expectations, with sales of $31.9 billion, adjusted operating margin of 30.8% (390 basis points of expansion, driven by the bottler refranchising), and adjusted earnings per share of $2.08 all near our estimates. However, we were slightly disappointed by management's lackluster outlook for 2019 profitability, with comparable earnings per share expected to remain within 1% of this year's figure (versus our estimate for high-single-digit growth). We expect to trim our near-term bottom-line outlook to incorporate greater currency headwinds (which reduced fourth-quarter revenue and operating income by 5% and 12%, respectively) and a lower degree of margin expansion, though we still think around 5% operating income growth is feasible over the longer term.

Moreover, we remain confident that the firm will be able to leverage its brand strength and pricing power, which underscore our wide moat rating, to drive mid-single-digit organic sales growth over our 10-year forecast. Organic sales for the year grew 5% and included a 2% contribution from price/mix, lifted by the firm's continued focus on higher-value packaging formats; we expect contributions from price/mix to average around 2% over our forecast. We expect to trim our $49 fair value estimate by 3% to 5% and, even with a high-single-digit percentage decline in shares on the announcement, would suggest investors await a more favorable entry point.

In North America (36% of sales), price/mix strengthened 2% in the fourth quarter, a significant improvement from the flat to negative performance in the prior three quarters, which helped offset the cost pressures that have been weighing on firms across the space. However, unit case volumes fell 1%, due to efforts to improve pricing for sparkling soft drinks, downsize juice packaging, and de-emphasize lower-margin tea products.

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