EUR 850.00 For Business Accounts Only

Morningstar | Solid Organic Sales Buoy Wide-Moat Coca-Cola's 2Q Results; Shares a Touch Rich

Despite the mid-single-digit uptick in shares, we see little in Coca-Cola’s second-quarter results to warrant a material change in our $49 per share fair value estimate or our long-term outlook (calling for around 4% average annual organic sales growth and 600 basis points of operating margin expansion to nearly 35% toward the end of next decade). Results through the first six months of the year generally align with our full-year expectations, but in light of the rise in the share price, we now think investors should await a more attractive risk/reward opportunity before building a position.

Dissecting its results, organic sales popped 6% (on top of 5% growth in the year-ago period), reflecting a 2% benefit from higher prices and favorable mix. We attribute the sales gains to the firm's investments behind its brands (which we think should aid the brand intangible asset that underpins our wide economic moat over the longer term). As evidence, management estimated that new product innovation contributed 25% to unit case volume in the quarter, versus just 15% two years ago.

From our vantage point, strengthened innovation (including that which is outside its carbonated soda drink mix) should lead to low-single-digit increases in price/mix longer term and profit gains. In this vein, Coca-Cola’s underlying operating margin (excluding foreign currency movements and acquisitions/divestures) ticked up 160 basis points to more than 33% during the quarter. However, we aren’t blind to the competitive and macro headwinds that could stall the firm’s trajectory. As such, we perceive the firm’s efforts to drive cost efficiencies and cease production of underperforming, lower-margin fare to focus its resources on areas that more effectively align with evolving consumer trends (including zero-sugar offerings, energy drinks, and sparkling beverages) as prudent.