Analyst Note| Nicholas Johnson, CFA |
After rebounding from the March 2020 trough late last year, shares of wide-moat Coke were again under pressure in recent weeks. This was ostensibly due to an adverse tax judgment, as well as the specter of a structurally higher effective tax rate going forward. Consequently, heading into its fourth-quarter earnings, we think investors were primarily looking for: any inkling as to the magnitude of the potential liability, and visibility into the prospects for the business in 2021. The results were decent (in line on revenue and ahead on earnings relative to FactSet consensus), and while the first quarter is off to a rocky start with renewed on-premises closures, we still believe the commercial backdrop should be favorable as we progress through the year. Regarding taxes, the new disclosures lent credence, we believe, to our standing hypothesis: it is difficult to conjure a scenario where the litigation outcome justifies the destruction in economic value implied by the market. Ultimately, after rolling our model and weighing the puts and takes in near-term guidance, we don't plan to change our $54 fair value estimate. For investors seeking exposure to a high-quality staple, we currently see a sufficient margin of safety in the stock.