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Coca-Cola - Underlying growth steady

Nicholas Hyett | 14 February 2019 | A A A
Coca-Cola - Underlying growth steady

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Coca Cola Company (The) Com Stk USD0.25

Sell: 52.29 | Buy: 52.30 | Change -0.15 (-0.29%)
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Coca-Cola saw underlying revenues rise 5% across both the final quarter of 2018 and the year as a whole, to $7.1bn and $31.9bn respectively. That reflects a fairly even split between price and volumes.

Underlying operating profits grew 8% in the final quarter and 11% for the year as a whole, reaching $8.7bn.

The shares fell 2.6% in pre-market trading, as guidance for next year came in at the lower end of expectations.

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Our view

Coca-Cola is sold in over 200 countries, and among the world's best known brands. But Coke's far from the only tipple in the cupboard. The Coca-Cola Company owns over 500 non-alcoholic drink brands, and 20+ brands generate sales of $1bn or more a year.

For all that Coca-Cola is a surprisingly focused company. It's a marketing machine, pure and simple, and its attention is devoted to soft drinks.

Rather than investing in big manufacturing plants, Coca-Cola partners with local bottling companies in what's known as the Coca-Cola System. That reduces the amount of capital tied up in the business and gives the group flexibility it might otherwise lack.

Instead Coke concentrates its efforts on selling the syrups themselves, and marketing its brands directly to consumers. Strong brands mean price rises don't risk losing customers, helping offset downturns that affect demand. That pricing power supports a gross profit margin of 60+%.

Of course there have been ups and downs over the decades, including a short lived foray into films in the 1980s that saw it produce Ghostbusters and The Karate Kid among several less successful names.

The Hollywood days may be long gone, but Coca-Cola's still happy to dabble in new markets. The acquisition of Costa Coffee, puts Coke in the hot beverages market for the first time, and with $500bn in annual sales globally, it's a potentially lucrative sector.

There've been a couple of wobbles in recent years - as refranchising some bottling territories negatively affected revenues, and tax changes in the US led to a one-off spike in costs. Look a bit deeper though and underlying volumes and margins have continued to improve.

Over the long run that strength has allowed the group to offer its shareholders some rich rewards. The dividend has risen every year for 56 years, although of course that performance might not be repeated. The shares currently offer a prospective yield of 3.4%.

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Full Year Results

Refranchising bottling operations and currency headwinds dented headline numbers in 2018. However, the underlying performance was positive, with the soft drinks giant continuing to gain market share.

Geographically growth was driven by results in emerging markets, particularly India and Central and Eastern Europe.

The sparkling category saw volumes grow 2% for the year as a whole. That was driven by China and India, with particularly strong results from Coca-Cola branded products and low-calorie offerings.

Sales of juice, dairy and plant based beverages shrank 1% in 2018, as the company deprioritised low-value brands in Africa and South-East Asia.

Water and sports drinks saw sales rise 3% thanks to Premium offerings in North America and stronger single-serve sales in China. Tea and coffee also grew 1% as the group launched several new products in Asia.

Coca-Cola is guiding for 4% revenue growth next year, with operating profits up 10-11%.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.