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Coca-Cola - serves up double-digit profit growth

Coca-Cola's revenue grew 12% on an organic basis, reaching $10.8bn in the fourth quarter.

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Coca-Cola's revenue grew 12% on an organic basis, reaching $10.8bn in the fourth quarter. Growth was driven by a 9% rise in prices and a 3% increase in volumes.

Underlying operating profit jumped 20% higher to $2.3bn, ignoring double-digit exchange rate impacts. This uplift was largely a result of the topline growth and improved margins, which was partially offset by increased marketing spend.

Free cash flow improved by $213mn to $9.7bn for the full year. Net debt fell from $26.2bn to $25.1bn.

In 2024, the group expects full-year organic revenue growth of 6-7%. Underlying earnings per share (EPS) are expected to grow by 8-10%, ignoring exchange rates.

The shares were broadly flat in pre-market trading.

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Our view

It was a strong finish to the year for Coca-Cola, with both higher prices and volumes contributing positively and helping revenue growth land ahead of the group's own expectations.

A key thing differentiating Coca-Cola from most other drink 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 a lid on costs 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 taking its foot off the pedal. 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 put a slight strain on the company's balance sheet, so paying down debt levels will likely remain a major focus in the near term. But with very healthy levels of free cash flow generation, the group's got plenty of room to funnel cash into other areas of the business too.

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. The group's valuation has come down over the last 12 months and now sits in the middle of its peer group. We think this marks an opportunity to pick up a quality company at an attractive valuation. But investors should remember nothing is immune to ups and downs, especially in the short term.

Environmental, social and governance (ESG) risk

The food and beverage industry tends to be medium-risk in terms of ESG though some segments like agriculture, tobacco and spirits fall into the high-risk category. Product governance is a key risk industry wide especially in areas with strict quality and safety requirements. Labour relations and supply chain management are also industry wide risks, with other issues varying by sub-sector.

According to Sustainalystics, Coca-Cola's management of ESG risk is strong. The group is committed to reducing its water use through targets and deadlines aiming for 100% regenerative water use in all facilities by 2030. It also offers strong human capital development programmes. However, there is potential for cases of deceptive or false advertising regarding the health benefits of the products, and this may increase as the market for healthier beverages and lower calorie alternatives continues to grow.

Coca-Cola key facts

All ratios are sourced from Refinitiv, based on the previous day's closing values. 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: 13th February 2024