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Coca-Cola - sales rise as the recovery begins

William Ryder, Equity Analyst | 20 April 2021 | A A A
Coca-Cola - sales rise as the recovery begins

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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 rose 6% to $9.0bn in Coca-Cola's first quarter. That reflects a 5% increase in concentrate sales, benefitting from five additional days in the quarter, and 1% increase due to changes in prices, product mix and sales channels.

Coke lost overall market share as sales shifted away from bars and restaurants, where it has a strong position, towards supermarkets. However, on an underlying basis Coke gained market share in both categories.

The group's comparable operating margin increased from 30.7% to 31.0% and operating profits rose 14% to $2.8bn. Comparable earnings per share grew 8% to $0.55.

Coke still 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 rose 1.1% 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 variations on its world famous brands meant sales enjoyed a long track record of growth prior to the COVID-19 pandemic.

The pandemic has primarily hit sales in bars and restaurants, a segment where the group has a particularly strong position. Fortunately, sales in supermarkets have helped offset some of the damage and management thinks the worst is behind them, expecting the group to return to growth this year.

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 $34.6bn in net debt, which is around 2.8 times 2020 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: 24.3
  • 10 year average 12 month forward Price/Earnings ratio: 20.6
  • Prospective dividend yield (next 12 months): 3.2%

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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Q1 Results (organic and comparable changes)

Europe, Middle East & Africa revenue fell 7% to $1.6bn, reflecting lower prices on drinks sold for at-home consumption, some changes to sales geography and a 2% drop in volumes. Operating profit fell 10% to $870m, primarily due to lower revenue. Coke gained market share in the quarter, mainly because of share gains in the Europe and Eurasia & Middle East regions.

In Latin America revenue rose 8% to $909m due to favourable changes to pricing and consumption habits, including inflation pricing in Argentina. Volumes were flat. Operating profit rose 15% to $563m which management attributed to revenue growth and cost management. The company gained market share during the quarter.

North American revenue grew 4% to $2.9bn, reflecting gains from price and channel changes. Operating profits grew 24% to $758m, thanks to strong pricing and costs controls. The company lost market share because of trading restrictions at bars and restaurants where the group has a strong position.

Asia Pacific revenue rose 18% on last year to $1.4bn thanks to higher concentrate sales. Operating profit rose 29% to $698m thanks to higher revenue and cost management. The group lost market share as losses in Japan were only partially offset by gains in China and Southeast Asia.

Global Ventures revenue fell 5% to $570m and operating profits grew 48% to $29m. Management attributed this to pressure on Costa stores in the UK, partially offset by a strong performance from Costa Express machines.

Bottling Investments saw revenue rise 17% to $1.9bn. Operating profit grew 91% to $133m thanks to effective cost management and strong pricing.

Coca-Cola generated $1.4bn of free cash during the quarter, up $1.2bn on last year.

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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.