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Recovery for Coke Will Be Prolonged

We don’t plan to change our $54 fair value estimate for the wide-moat company.

Wide-moat Coca-Cola’s KO third-quarter earnings were bound to be fraught, as investors would not only be looking for details about results and outlook but also insight into the slew of recent strategic announcements (the internal reorganization and partnership with no-moat Molson Coors for Topo Chico Hard Seltzer being the most prominent). Ultimately, the results were solid (ahead of CapIQ consensus expectations on both the top and bottom lines), and while it’s still unclear when coronavirus-induced pressures will reach their coda, the firm’s strategic initiatives support our confidence in its long-term prospects. We don’t plan to change our $54 fair value estimate, and despite rallying meaningfully from the lows in March, the shares still strike us as modestly undervalued.

Revenue came in at $8.65 billion, down 9% year over year and 6% organically, with both price/mix and concentrate volume down 3%. The narratives surrounding these two levers were unchanged, with adverse channel and packaging mix affecting the former, and weakness in on-premises channels, which remain beleaguered by COVID-19 restrictions, hitting the latter. Geographically, markets like the United States and Brazil were bright spots, but other core markets like Mexico, India, and countries across Europe remained an albatross.

A core tenet of the firm’s reorganization entails cutting the tail of the innovation pipeline and reducing the number of brands across the portfolio. It expects to transition to a portfolio of 200 master brands, down from roughly 400 today, with trademarks like Odwalla and Zico being jettisoned. While there are puts and takes, we view the portfolio approach constructively. Most of the discontinued brands are likely to be noncarbonates, which may reduce scale in some categories that have different production processes and ingredient profiles. Nevertheless, we expect this to be offset by the streamlining of processes and more scalable innovation.

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