Coca-Cola Brews Up Stout Sales to Close Out FY21

Fourth-quarter results showcased the strength of wide-moat Coca-Cola’s KO leading brand mix, with organic sales up 9% (reflecting a 10% benefit from price/mix). We recognize this was on top of weak marks a year ago (down 3%), when the firm’s operations (particularly its away-from-home sales) were thwarted by mobility restrictions to curb the spread of COVID-19. However, we think the tide is turning; the fourth quarter marked the first since the pandemic that away-from-home volumes exceeded 2019 levels. And impressively, this hasn’t come at the expense of the firm’s at-home business, where management qualitatively cited continued strength.

Profits decayed (the adjusted operating margin shrank 520 basis points to 22.1%), but we don’t harvest concerns, as Coca-Cola prudently funneled significant resources toward marketing (qualitatively referenced). From our vantage point, this illustrates it’s more focused on bolstering its competitive prowess than preserving near-term profits in the face of extensive inflation. Management pegs a commodity hit in the mid-single-digits in fiscal 2022, but we expect Coca-Cola will employ a combination of price hikes, price/pack architecture, and productivity initiatives to protect margins longer term. And despite the near-term angst, we think it maintains sufficient opportunity for operating margins to percolate--which we see reaching the low-30s--as it pursues efficiencies, optimizes its portfolio, and streamlines its technology infrastructure.

Management’s initial fiscal 2022 targets--7%-8% organic sales growth and 8%-10% adjusted EPS growth--seem attainable. When taken with fiscal 2021 results that generally aligned with our forecast, our $59 fair value estimate shouldn’t change, outside of a small uptick for time value and as we reverse our prior outlook for a step-up in U.S. corporate tax rates. But with the stock trading a touch above our intrinsic valuation, we don’t think investors should load up on shares at current levels.

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