Solid Q1 at Coke, Yet No Changes to Fair Value Estimate

With the market seeming to shrug off worries about wide-moat Coca-Cola’s KO tax quandary heading into its first-quarter earnings (appropriately so, in our view), we believe investors were squarely focused on signs of business recovery amid the pandemic and progress on strategic initiatives. The report was constructive on both fronts, with results that were ahead of FactSet consensus on the top and bottom lines and an announcement of plans to monetize one of Coke’s largest bottling investments—Coca-Cola Beverages Africa—via IPO. This aligns with Coke’s strategic belief in intermediation along its value chain, and while transaction details aren’t public, we don’t expect a material valuation impact. After weighing the quarter’s results, we don’t plan to materially change our $55 fair value estimate, and while the recent share rally has eroded the margin of safety we saw earlier in the year, we’d watch for any pullbacks.

Revenue came in at $9.02 billion, up 5% year over year and 6% organically (5% volume and 1% price/mix). While calendar shifts (five more days in the quarter) made a nontrivial contribution to growth, underlying performance was encouraging and improved sequentially throughout the quarter. In fact, March 2021 volumes were at parity with 2019 prepandemic levels. With March 2020 stockpiling making this the toughest comparable quarter, we expect easier comps and improving mobility to support high-single-digit organic growth in 2021 despite vaccination challenges in key markets in Europe and Latin America.

Adjusted operating margin was commendable, up 40 basis points to 31%. While some of the margin benefits remain specific to the pandemic (lower trade, marketing, and travel spending, for example), we believe there will be ample offsets as costs come back into the system.

The potential for an unfavorable resolution in its tax dispute with the IRS around transfer pricing remains a cost hang, but we believe any cash outlay will be reasonable.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.