Coca-Cola Keeps Chugging Along

With wide-moat Coca-Cola’s KO stock at all-time highs heading into its fourth-quarter earnings release, we believe investors were looking for clarity on: 1) The health of the firm’s top line, and 2) the profit implications of ongoing investments to maintain its growth trajectory. The firm did not disappoint in either respect; both the top and bottom lines came in slightly ahead of our expectations, and initial 2020 guidance calling for 5% organic sales growth and 8% operating income growth is in line with management’s long-term targets. We remain sanguine on the firm’s competitive position, and will be raising our $54 fair value estimate by a mid-single-digit clip as we roll our model forward. Shares continue to appear fully valued from our vantage point, with growth vectors already priced in.

Revenue came in at $9.1 billion for the quarter, representing 16% year-over-year growth, though the preponderance of this was inorganic and reflected the Costa acquisition as well as the inclusion of Coca-Cola Beverages Africa (CCBA) in continuing operations. Still, organic growth of 7% was quite robust, with a whopping 5% due to price/mix. We attribute these gains primarily to Latin America, as bottlers like Coca-Cola FEMSA continue to cope with inflationary economies and prioritize smaller package sizes, as well as outsize influence from CCBA, which is a finished goods business and thus receives higher per-unit sales. We continue to expect volume to modestly supplant pricing in its contributions to the top line longer term, as income growth and infrastructure investments in developing/emerging markets start to bear fruit.

Coke’s margin story remains a mixed bag with a slew of moving parts that this quarter largely netted to neutral, as adjusted operating margins were roughly flat at 25%. Longer term, we continue to see healthy operating leverage, driven by increased scale in non-carbonate categories and technology-enabled operational optimization.

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