Welcome to HL's reimagined News, Insights and Research experience. Find out more

Share research

Coca-Cola - higher revenues outstrip growing costs

Coca-Cola's revenue grew 12% on an organic basis, reaching $11.0bn in the first quarter.

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Prices delayed by at least 15 minutes

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

Coca-Cola's revenue grew 12% on an organic basis, reaching $11.0bn in the first quarter. Growth was largely driven by an 11% increase in selling prices, as well as a 1% increase in concentrate sales.

Operating income came in at $3.4bn during the first quarter. Ignoring the effects of exchange rates and other items affecting comparability, there was a 15% increase in underlying operating profit. The associated margin grew by 1.17 percentage points to 32.6%, primarily driven by top line growth which was partially offset by increased marketing spend and higher operating costs.

There was a free cash outflow of around $120m in the first quarter, which reflects a decline of around $520m against the prior year. This was largely due to the unhelpful timing of payments for machinery and inventory, as well as for acquisitions and divestitures.

Full-year underlying EPS is still expected to grow between 7-9%, ignoring the impact of exchange rates and other items affecting comparability.

The shares rose 1.2% following the announcement.

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

Our view

Coca-Cola's started the year with a bang. Organic revenue grew by double digits again this quarter, driven upwards by higher average selling prices. Loyal customers kept coming back for more of the group's famous fizzy drinks, pushing total volumes up 3% - 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 BODYARMOR sports drinks to the mix has opened the group up to the growing global health drinks market. 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 to see. And free cash flow turned negative in the first quarter due to the unhelpful timing of cash flows. Although we view this as a temporary blip, it's certainly a figure we'll be keeping a close eye on as the year progresses.

Coca-Cola owns one of the strongest brands in the world, and there's a lot to be said for that in an uncertain environment. Even if inflation sticks around this year, we expect the group to 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 on a price-to-earnings basis.

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.

Latest from Share research
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
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.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 24th April 2023