Coca-Cola’s ‘Stellar’ Q2 Earnings Highlights Strength of Beverage Portfolio

We think Coca-Cola’s (KO) stellar second-quarter results showcased the pricing power of its stout beverage portfolio. Organic revenue growth clocked in at 16% (12% from price/mix and 4% from concentrate sales), on top of whopping 37% organic revenue growth in the same period a year ago. And even as prices at the shelf have continued to climb (including roughly 8%-10% inflation rate in the U.S. and Europe, per management), demand elasticities remain resilient, further evidence of Coke’s strong brand intangible asset. From our vantage point, the extent to which Coke is prioritizing innovation at the premium and value tier (particularly as it relates to varying pack sizes) should help stymie the threat of ongoing inflationary pressures to volumes.

Profits shriveled, however, with the adjusted operating margin slipping roughly 110 basis points to 30.7%, due to a slew of factors (the consolidation of BodyArmor finished goods business and currency headwinds, latter of which should prove transitory, in our view). While management expects higher commodity costs to persist in the back half of the year, we believe Coke is well-equipped with the necessary arsenal to combat these pressures. We particularly view price/pack architecture and incidence-based pricing strategies as prudent and believe further cost savings should dull the hit to profits longer term, with our forecast calling for operating margins in the low-30s by 2026.

In concert with these second-quarter marks, management edged up its fiscal 2022 top-line guidance, now expecting 12%-13% organic sales growth (from 7%-8% prior), while holding firm on its comparable adjusted EPS growth of 5%-6% (From $2.32 in 2021). We may adjust our near-term forecast to reflect the results through the first half of the year, but our long-term outlook (which includes mid-single-digit top-line growth) stays intact. Shares trade above our unchanged $58 fair value estimate, and we suggest investors await a more compelling risk/reward.