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Coca Cola - momentum continues as guidance is raised

Sophie Lund-Yates, Equity Analyst | 27 October 2021 | A A A
Coca Cola - momentum continues as guidance is raised

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Coca Cola Company (The) Com Stk USD0.25

Sell: 64.99 | Buy: 65.00 | Change 0.11 (0.17%)
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Third quarter net revenue rose to $10bn, with organic growth of 14%. This reflected an 8% rise in concentrate sales and 6% increase due to pricing and product mix. As a result, operating profits were up 11% to $2.9bn, despite a "significant increase" in marketing spend compared to last year.

Management upped guidance for full year organic revenue growth to between 13% and 14%.

The shares rose 2.7% following the announcement.

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Our view

While Coca-Cola's recovery is well and truly underway, it's not immune to wider conditions, with cost inflation and lingering restrictions still a thorn in its side.

That said, the group has plenty of breathing room to overcome these challenges. 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's supported a gross profit margin of 60%, which in turn has backed over half a century of dividend growth. Whether this can be repeated going forward remains to be seen though.

Fundamentally, Coca-Cola is a marketing machine, and its attention is devoted to soft drinks. The pandemic hurt bar and restaurant sales, but the strength of the Coke brand in supermarkets was enough to carry the group to a recovery.

An uptick in marketing spend suggests the group isn't sitting back on its laurels though. Coke is updating its strategy and brand portfolio to focus more on sharpening its proposition on a regional and local level, 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 put 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. We're already starting to see the benefits of this deal as UK Costa retail stores reopen.

The Costa deal has also increased the strain on the company's balance sheet, although it is improving. Coca-Cola is carrying $26.7bn in net debt, which is slightly higher than ideal. 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. Now that restaurant and bar sales are starting to make a comeback, the group looks to be back to where it was pre-pandemic. Coke owns one of the best brands in the world, and there's a lot to be said for that even as uncertainty persists. As ever though, nothing is guaranteed.

Coca-Cola key facts

  • Price/Earnings ratio (next 12 months): 22.7
  • 10 year average Price/Earnings ratio: 21.0
  • 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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Coca Cola third quarter results (Constant Exchange Rates)

Revenue for Europe, Middle East & Africa was $1.9bn with 13% organic growth. Led by Russia, Great Britain, Nigeria and Turkey. Operating income grew 10% to $1bn.

Latin America posted organic growth of 33%, with revenue of $1.1bn. Price/mix was up 23%, driven by pricing actions in the marketplace and favourable channel/package mix. Operating income grew 30% to $711m with strong growth in Mexico, Brazil and Argentina.

The recovery in fountain drinks (those served from a machine) as coronavirus worries eased, helped revenue in North America reach $3.5bn. Organic growth of 13% was underpinned by a fairly even mix of volumes and price/mix. Operating income of $940m was up 13%.

Asia Pacific revenue was $1.4bn with organic growth of 2%. A 3% rise in volumes offset a drop in price/mix caused by growth in emerging and developing markets, outpacing developed markets. Operating income of $598m reflects a 2% drop.

Organic growth of 39% helped Global Ventures post revenue of $753m as Costa stores continue to reopen across the UK. Operating income shifted from a loss last year to $110 profit this quarter.

Bottling Investments posted revenue of $1.7bn with organic growth of 9%, with strong growth in India and South Africa. Operating income of $80m was a rise of 41%, driven by effective cost management.

Year-to-date free cash flow was $8.5bn, up $3bn in 2020, largely because of increased cash flow from operations. The group had net debt of $26.7bn at the start of October, compared to $32.0bn at the start of the 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.