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Coca-Cola - Steady volume growth, guidance upgraded

Nicholas Hyett | 23 July 2019 | A A A
Coca-Cola - Steady volume growth, guidance upgraded

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Coca Cola Company (The) Com Stk USD0.25

Sell: 54.45 | Buy: 54.46 | Change 0.10 (0.18%)
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Second quarter results saw organic revenue rise 6% to $10bn, with volumes contributing 4% and price a further 2%. Although underlying operating margins improved, currency headwinds and acquisitions meant earnings per share only rose 4%.

Both revenues and earnings per share were ahead of analyst expectations. Management have upgraded full year expectations for organic revenue and operating profit growth.

The shares rose 3.6% in pre-market trading.

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Our view

Coca-Cola is sold in over 200 countries, and among the world's best known brands. Weird and wonderful flavour varieties - most recently Energy and Plus Coffee - mean sales continue to grow even after 133 years. 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, and holds stakes in, 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 are less likely to lose customers, helping offset downturns that would otherwise 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 along 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. With $500bn in annual sales globally, it's a potentially lucrative sector and Coke's got ready to drink cold coffees in the pipeline too.

But the Costa deal has also increased the strain on the company's balance sheet. Coca-Cola is expected to finish the year with net debt of over $35bn, more than 3 times forecast EBITDA (earnings before interest, tax, depreciation and amortisation). High levels of debt increase risk, even for a high quality company like Coca-Cola, and it doesn't mix well with a relatively demanding P/E ratio of 23.3.

Over the long run shareholders have enjoyed some rich rewards, and recent trends remain encouraging. The dividend has risen every year for 56 years and the yield of 3.2% should be comfortably covered by earnings. Coca-Cola may be a bit more exposed than in the past, but we don't think the company's lost its fizz, even if historic performance is unlikely to be repeated.

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Second quarter results

Coca-Cola reported organic revenue growth across all regions, driven by a 3% increase in sparkling soft drink volumes. The Coca-Cola brand delivered a particularly strong result - with Coca-Cola zero sugar delivering a seventh consecutive quarter of double digit volume growth.

The recently acquired Costa Coffee business has launched its first ever ready-to-drink product in the UK this quarter, with plans to roll-out into new markets later in the year. Bottler Coca-Cola HBC is planning to introduce Costa Coffee across ten markets in 2020.

Sales of Coca-Cola Energy are looking positive, with the product available in 14 markets and the group targeting 20 by the end of 2019. The innocent smoothie brand is due to launch in Asia, starting in Tokyo.

Coca-Cola continues to invest in recycling facilities around the world.

Management now expect the group to deliver organic revenue growth of 5%, with operating profit growth of 11-12%. However earnings per share guidance remains unchanged. Operating cash flow for the year is expected to reach $8.5bn, with $2.4bn of capital expenditure.

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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.