Coke Still on Track; Shares Fully Valued
First-quarter revenue growth for the wide-moat beverage maker trailed our full-year estimates, but we expect growth to increase later in the year, writes Morningstar's Adam Fleck.
Wide-moat
We’re encouraged by the firm’s North American performance, where continued solid noncarbonated beverage volume performance (up 5%) more than offset flat soda volumes, while pricing added an additional three points of growth. This price performance outpaced PepsiCo’s 1% quarterly result, though we attribute some of this outperformance to timing and mix differences at Pepsi. Over the longer term, we expect both Pepsi and Coke to remain committed to rational pricing in the U.S. market, leading to 2%-3% price and mix contribution at each company.
With this strong North American performance, the segment’s profitability (excluding consolidating revenue eliminations) ticked up about 70 basis points, helping to drive total company adjusted operating margins to 23.8%, up from 23.4% a year ago. We expect further productivity improvements and positive pricing to support long-run margin expansion, but rising raw material costs, short-term structural issues (primarily bottling refranchising), and slowing North American still-beverage growth (owing to more difficult comparisons) will lead us to slightly lower our current 24.4% operating margin forecast for full-year 2016.
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