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Coca-Cola Company - Profit upgrades on strong sales

Nicholas Hyett | 18 October 2019 | A A A
Coca-Cola Company - Profit upgrades on strong sales

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Coca Cola Company (The) Com Stk USD0.25

Sell: 54.47 | Buy: 54.48 | Change -0.13 (-0.24%)
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Coca-Cola reported 8% year-on-year revenue growth in the first quarter, with organic growth of 5%. Operating profits rose 5%, after discounting currency movements.

The strong quarterly performance led to bump in revenue and profit guidance for the full year.

The shares rose 2.6% 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+%.

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 $34bn, nearly 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 23.9.

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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Third Quarter Results

Revenue growth was driven by 6% price growth, taking quarterly revenues to $9.5bn. Unit sales rose 2%, with positive results across the board. Underlying operating margin in the quarter fell to 28.1%, compared to 30.7% last year, as sales timing and increased marketing spend weighed on profitability.

Initiatives completed or begun in the quarter include an increase in coolers in Brazil, the roll-out of Coca-Cola Coffee and imminent launch of Coca-Cola Energy in the US. Coca-Cola Zero Sugar continues to enjoy healthy growth in the key US market, forming one of the major drivers of growth in the quarter.

Latin America delivered particularly strong results in the quarter, with revenues up 12% thanks to a strong pricing performance. However, the group gained market share and delivered sales and underlying profit improvements across all its major geographies.

The Global Ventures business, benefitted from the acquisition of Costa with profits up 79% at constant currency. However, organic sales also improved 14%, led by the dogadan tea business in Turkey, innocent smoothies and Monster Energy drinks.

The group now expects full year organic revenues to grow by at least 5%, with underlying operating profit growth of between 12% and 13%.

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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.