EUR 850.00 For Business Accounts Only

Morningstar | Solid Pricing Boosts Coca-Cola's Top Line in 3Q; Shares Approaching FVE

Wide-moat Coca-Cola posted strong third quarter results, with organic revenues up 6% (2% contribution from price/mix) as the firm's investments in its brands propped up sales across each of its geographies. Organic sales grew 9% in the Europe, Middle East, and Africa segment (24% of sales) and 19% in Latin America (12% of sales), with high-single-digit price/mix improvement in each of these segments offsetting broader macroeconomic challenges in the Middle East, North Africa, and Argentina. Unit case volume in North America (36% of sales) grew 1%, driven by double-digit growth across brands like Coca-Cola Zero Sugar and Powerade Zero; these volumes were partly offset by lower juice volumes (due to a shift to smaller package sizes). Comparable operating margin expanded 570 basis points to nearly 33%, reflecting the structurally higher margins Coca-Cola has been able to achieve following the refranchising of its North American bottlers. Moreover, the firm's ongoing efforts to extract costs from its operations should help it strengthen its brand investments (in the form of marketing and new product development) while still delivering bottom-line growth. We aren't expecting a significant change to our $49 fair value estimate or longer-term outlook, which calls for around 4% organic growth and mid-30s operating margin on average over our forecast, as we incorporate these results.

From our perspective, Coca-Cola will need to maintain a robust pipeline of innovative products to sustain this level of growth, and we think the company's ability to quickly scale new offerings and expand their distribution through its vast global network should help its portfolio adapt to evolving consumer tastes. As evidence, it plans to launch smartwater in 20 markets this year and launch two line extensions (smartwater antioxidant and smartwater alkaline) in the U.S. to bolster its position in the enhanced water category.

Further, as seen by an uptick of deals in the third quarter, we think Coca-Cola may occasionally tap into inorganic opportunities for growth as a means to support its broader strategy, allowing it to enter new categories or more quickly bring new fare to market. This rationale is evidenced by the pending acquisition of Costa (which should allow the firm to enter the hot coffee category, and is expected to close in the first half of 2019) for $5.1 billion (roughly 16 times fiscal 2018 EBITDA), the acquisition of Organic & Raw Trading (marking its first fully owned brand in the kombucha category), and the equity investment in Bodyarmor (a premium sports drink). However, we surmise that the firm's prudent track record of capital allocation will continue, and that its key focus will remain on its existing brand set, rather than paying up for a future deal.