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Coca-Cola - growth across the globe

Emilie Stevens, Equity Analyst | 30 January 2020 | A A A
Coca-Cola - growth across the globe

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Coca Cola Company (The) Com Stk USD0.25

Sell: 49.62 | Buy: 49.63 | Change -0.41 (-0.82%)
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Coca-Cola's organic revenues rose 7% in the final quarter and 6% over the year to reach $37.3bn. Reflecting improvements in both volumes and prices. Underlying operating profits grew 23% in the quarter and 13% over the year to $10bn.

Both revenue and profit growth for the year came in slightly ahead of previous guidance.

The shares rose 1.9% in pre-market trading.

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Our view

Coca-Cola is sold in over 200 countries and territories, and is 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 over 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 finished the year with net debt of $35bn. 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 25.

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% is 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 historical performance is unlikely to be repeated.

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Full Year Results

Coca-Cola saw organic revenue and profit growth across all geographies. The group saw the largest value share gains in over a decade, reflecting growth in both its sparkling and non-sparkling offerings.

Europe, Middle East & Africa revenues hit $7.1bn with organic growth of 5%, with comparable operating profits rising 9% to $3.5bn. This reflects a 2% rise in sales and 4% growth in prices, with Coca-Cola gaining value share across all categories.

Revenues in Latin America reached $4.1bn, with organic sales up 13% and comparable operating profits rose 17% to $2.4bn. While sales volume grew 1%, prices rose 13% over the year - the highest growth of all geographies.

North American revenues came in at $11.9bn with organic revenue growth of 3% and operating profits up 5% to $2.6bn. Prices were 3% higher over the year but sales volumes remained flat.

Asia Pacific recorded revenue of $5.3bn, with organic growth of 5%, and operating profits rose 3% to $2.3bn. Prices remained flat over the year but sales volume rose 5%.

Following the acquisition of Costa Coffee Global Ventures reported revenues of $2.6bn, with organic revenue growth of 7%. Operating profits increased 125% to $334m.

Bottling Investments, which sells drinks and syrups to distributors, wholesalers and bottling partners, posted $7.4bn in revenue with organic growth of 9%. Divisional operating profits rose 411% to $358m - reflecting improvement from an operating loss last year.

Reflecting a year of strong underlying growth, Coca-Cola generated $8.4bn in free cash flow over the year, up 38% from the prior year. Net debt finished the year 6.5% higher at $35bn.

Looking ahead to 2020 Coca-Cola expects to grow organic revenues by around 5% and underlying operating profits by 8%. Free cash flow is expected to be around $8bn and capital expenditure approximately $2bn.

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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 disclosure for more information.