EUR 850.00 For Business Accounts Only

Morningstar | Coca-Cola Begins 2019 on Solid Footing, as New Product Innovation Supports Top-Line Momentum

Wide-moat Coca-Cola posted strong top-line performance in the first quarter, with organic revenue growth of 6% (including a 5% lift in price/mix) supported by innovation across its product portfolio. Trademark Coca-Cola (which accounted for 45% of global unit case volume in 2018) remains the highlight of the sparkling soft drink category (69% of unit case volume), which chalked up 1% volume growth during the quarter. From our vantage point, management's focus on innovation in the Coca-Cola brand family (as evidenced by double-digit sales growth for Coca-Cola Zero Sugar for the sixth quarter in a row and the recent launch of Orange Vanilla Coke) should reinforce the substantial brand equity that underpins the firm's competitive edge. Further, we appreciate Coca-Cola's ongoing efforts to build out its noncarbonated beverage portfolio (particularly in light of secular declines in domestic per-capita soda consumption), with unit case volume in the water, enhanced water, and sports drink category cluster growing 6% and plans to launch Costa ready-to-drink coffee products in the second quarter.

We contend the firm's investments behind its brands have helped it support this solid trajectory of growth, with management estimating that new product innovation contributed 17% to unit case volume in 2018, versus just 9% in 2015. We think strengthened innovation will support low-single-digit increases in price/mix longer term as well as profitability improvement (as evidenced by underlying operating margin, which excludes headwinds from currency and acquisitions, expanding 240 basis points to more than 34% during the quarter). We aren't anticipating a large change to our $47.50 fair value estimate or longer-term outlook (which calls for mid-single-digit revenue growth and average operating margin in the mid-30s) as we incorporate these results and would suggest investors wait for a more favorable entry point.

In North America (33% of sales) we were pleased to see a 4% increase in price/mix offset a 3% decline in concentrate sales, as the firm's domestic mix continues to shift toward smaller formats like mini cans, which grew 14% during the quarter. We expect low-single-digit improvements in price/mix in the region to persist longer term, as the firm continues to emphasize nontraditional, higher-margin formats (management has estimated mini cans generate two times the system gross profit as 12-ounce packs). Performance abroad also remained strong, with organic revenue up 14% in the Europe, Middle East, and Africa region (22% of sales) and 6% in Latin America (11% of sales) thanks to strengthened pricing.