Coke: Not All Bad News

We’re holding our $43 fair value estimate for wide-moat

We're also encouraged by Coke's volume performance in the quarter; unit case sales (a measure of end-market demand) ticked up 3% from a year ago, with noncarbonated beverages climbing a solid 6%. Carbonated soft drink volume also increased about 2%, though this was split between continued poor performance in diet drinks (Diet Coke fell 8% year over year) and positive performance in Coca-Cola (up 1%) and Coke Zero (up 8%). The company's own concentrate volume was flat in the quarter owing to intrayear timing; concentrate sales had led unit case sales earlier in the year. This led to a currency-neutral revenue organic revenue growth rate of about 3%. Year to date, concentrate sales are up about 3% but face a particularly difficult year-over-year comparison in the final quarter, leading us to maintain our full-year 1% volume growth outlook.

Coke's profitability was solid in the quarter, with adjusted margins roughly flat with a year ago in both the quarter and year to date, running slightly ahead of our full-year expectations. While we plan to adjust our near-term assumptions to account for this cost control, we already expect margin improvement over the long run (to 27% from about 24% in 2014) stemming from productivity plans, improved pricing, and increased volume.

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