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Coca-Cola - sales down in a tough year

Sophie Lund-Yates, Equity Analyst | 12 February 2021 | A A A
Coca-Cola - sales down in a tough year

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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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Organic net revenue fell 3% to $8.6bn in Coca-Cola's fourth quarter, reflecting lower volumes and prices. Revenue was also held back by reduced consumption in pubs and restaurants because of the pandemic. Full year organic net revenue fell 9% to $33.0bn.

Despite the lower revenue, cost saving efforts meant comparable operating income grew 14% to $2.4bn in the quarter.

Coke expects high single digit organic revenue growth in the current financial year, and high single to low double digit comparable earnings per share growth.

The shares were broadly flat following the announcement.

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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 variations on its 21 billion dollar brands meant sales enjoyed a long track record of growth prior to the COVID-19 pandemic.

So far, coronavirus has primarily impacted the group's sales in pubs and restaurants etc. Overall volumes fell over the last year, but have been improving , and management thinks the worst is behind them. The group expects to return to growth this year, although nothing is guaranteed.

Fundamentally, Coca-Cola is a marketing machine, and its attention is devoted to soft drinks. We think the strength of the Coke brand will be enough to carry the group to a recovery, although the pace will depend on the success of the vaccines and the recovery of bars and restaurants.

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 has supported a gross profit margin of 60+% in normal times, which in turn has supported over half a century of dividend growth. Whether this can be repeated going forward remains to be seen though.

Coke is updating its strategy and brand portfolio, but it looks more like a refinement than a revolutionary change to us. Nonetheless, it's encouraging to see the group moving forward.

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. Unfortunately, lockdowns in Europe have hampered profits this year.

The Costa deal has also increased the strain on the company's balance sheet. Coca-Cola is carrying $34.2bn in net debt, which is around 2.8 times cash profits. High levels of debt increase risk, even for a high quality company like Coca-Cola.

Over the long run shareholders have enjoyed some rich rewards, and trends were encouraging before coronavirus began disrupting the global economy. Coke owns one of the best brands in the world, and there's a lot to be said for that in such uncertain times. As ever though, nothing is guaranteed.

Coca-Cola key facts

  • 12 month forward Price/Earnings ratio: 23.4
  • 10 year average 12 month forward Price/Earnings ratio: 20.4
  • Prospective dividend yield (next 12 months): 3.4%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Q4 Results

Europe, Middle East & Africa revenue fell 6% to $1.4bn, reflecting negative price movements and changing consumption habits, there was also a 4% drop in volumes. Operating profit grew 23% to $766m, thanks to "effective cost management". Over the full year, Coke lost market share across most category clusters.

In Latin America revenue rose 2% organically to $1.0bn, and volumes also rose 2%. Operating profit rose 10% to $584m - which management also attributed to cost savings.

North American revenue fell 3% to $2.9bn reflecting a 7% fall in volume and a 3% gain from price and channel changes. Operating profits grew 23% to $782m reflecting strong pricing and costs controls.

Asia Pacific revenues were $1.1bn, an 8% fall on last year. Volumes fell 4% due to the pandemic and poor weather in Southeast Asia. Operating profit fell 6% to $405m.

Global Ventures recorded revenues of $610m, a fall of 17%. The division made an operating loss of $4m thanks to pressure on Costa stores.

Bottling Investments, which sell drinks to distributors, wholesalers and bottling partners, saw revenue rise 2% to $1.9bn. Operating profit grew 25% to $184m thanks to effective cost management and strong pricing.

Net debt stands at $34.2bn, down from $34.8bn at the end of 2019. Coca-Cola generated $8.7bn of free cash during the full year, up 3% on last year thanks to lower capital spending.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.