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Coca-Cola - higher prices drive revenue growth

Coca-Cola's organic revenues grew 15% to $10.1bn in the fourth quarter, driven upwards by higher average selling prices.

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Coca-Cola's organic revenues grew 15% to $10.1bn in the fourth quarter, driven upwards by higher average selling prices.

Underlying operating income rose 21% to $2.1bn. This reflects the strong revenue growth but was partially offset by by higher operating costs and marketing spending.

Net debt fell slightly from $26.8bn to $25bn, while full-year free cash flow also fell by $1.7bn to $9.5bn.

Looking to 2023, organic revenue growth of 7% to 8% is expected. Excluding currency headwinds, Coca-Cola is expecting underlying earnings per share (EPS) to grow by 7% to 9% from this years base of $2.48 per share.

The shares were broadly flat in pre-market trading.

View the latest Coca-Cola share price and how to deal

Our view

Coca-Cola is flexing its muscles and showing everyone that it's still a global powerhouse. Boosting full-year organic revenues by double figures is no mean feat, especially at a time when consumers are feeling the pinch of a cost-of-living crisis. And despite price hikes, loyal customers kept coming back for more of the group's infamous fizzy drinks, pushing total volumes up 5%. That's testament to some seriously strong brand power.

A key thing differentiating Coca-Cola from most other drinks makers is its operating model. 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 allows the group to keep costs down and supports its industry leading gross margins, which hover around the 60% mark. Instead, Coke concentrates its efforts on selling the syrups themselves and marketing its brands directly to consumers.

Fundamentally, Coca-Cola is a marketing machine, and its attention is devoted to soft drinks. A continued rise 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.

Coca-Cola's diversification has undoubtedly played a large part in its resilient sales too. The group owns other household favourites like Fanta, Sprite and Schweppes, and the acquisition of Costa Coffee put Coke in the hot beverages market for the first time. Adding recently acquired BODYARMOR sports drinks to the mix has opened the group up to the growing global health drinks market, which. We see these as positive add-ons in segments of the drinks market that still have room to grow.

But for all their benefits, these acquisitions have put a slight strain on the company's balance sheet, Net debt has started to creep down in the right direction but it's still higher than we'd like, even for a business expected to generate $9.5bn in free cash flow next year.

Coca-Cola owns one of the best brands in the world, and there's a lot to be said for that in an uncertain environment. Even if inflation sticks around, the group should be able to keep passing higher costs straight onto consumers in the form of more price hikes. Though, expect to pay a slight premium for this benefit, as the group trades ahead of its long-term valuation.

Coca-Cola key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 15th February 2023