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Coca-Cola - strong EPS guidance despite inflation

Organic revenues grew 9% to $9.5bn in the fourth quarter.

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Organic revenues grew 9% to $9.5bn in the fourth quarter. This reflected improvements in pricing and a more favourable mix of products sold, which offset a 1% decline in concentrate sales, hurt by the timing of the quarter which meant there were 6 fewer trading days.

Underlying operating income, which strips out currency changes, declined 12% to $2.1bn. Fewer days in the reporting period coupled with higher marketing spend were responsible for the fall.

The group expects full-year organic revenue growth of 7-8%. Cost inflation is expected to continue at in the mid-single digits and underlying earnings per share growth is forecast to be 8-10%.

The shares rose 1.2% in pre-market trading.

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

Our view

Beverage giant Coca-Cola is still coping with elements outside its control - pandemic concerns have been replaced with worries about rising inflation. Plus, the rising cost of living means as budgets get stretched people may become less willing to go out for a drink.

Coca-Cola weathered the coronavirus storm well, and the group has plenty of breathing room to overcome these new 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.

A 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.

The acquisition of Costa Coffee put Coke in the hot beverages market for the first time. And the group's also added BODYARMOR to its stable of brands, helping it increase sales in the growing global health drinks market.

For all their benefits, these acquisitions increased the strain on the company's balance sheet, although it is improving. Coca-Cola is carrying $28.5bn 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 back, 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. As ever though, nothing is guaranteed.

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.

Fourth Quarter Results (Organic)

Sparking soft drink volumes outpaced 2019 levels with sales up 8% with trademark Coca-Cola sales up 7%. Nutrition, juice, dairy and plant-based beverage revenues rose 11% also ahead of 2019 levels. Both performed well across all geographic segments. Hydration, sports, coffee and tea sales increased 12%, helped by strong growth in sports drinks after the acquisition of BODYARMOR and the reopening of Costa stores in the UK.

Europe, Middle East & Africa saw sales rise 17% to $1.6bn, reflecting an 11% rise in volumes and a favourable price mix, reflecting an ongoing recovery in markets where pandemic-related uncertainty was abating. This fed through to an 8% increase in operating income to $829m.

A decline in concentrate sales due to the timing of shipments partly offset pricing improvements and a rise in volumes in Latin America, sending revenue 2% higher to $1.0bn. Operating income declined 3% to$593m driven by an increase in marketing spend.

Sales in North America rose 14% to $3.4bn, as both price and volumes improved. This was driven by a recovery in the fountain business as pandemic worries eased. Operating income fell 1% to $774m as higher marketing spend mostly offset revenue improvements.

Rising volumes were more than offset by pricing declines as the group expanded into emerging markets in Asia Pacific, sending sales 3% lower to $1.0bn. Together with rising marketing spend, this fed into an operating income decline of 29% to $277m.

Global Ventures saw double digit improvements in price and volume with concentrate sales up 10% as Costa stores reopened in the UK. This led to a 25% rise in revenue to $775m. Operating income was flat at $79m.

Bottling investments saw revenue rise 3% to $1.9bn driven by growth in India and the Philippines. Operating income fell 12% to $172m reflecting increased costs.

Free cash flow for the year was $11.3bn compared to $8.7bn last year. However this excludes $4.8bn spent on acquisitions in 2021. Net debt was $28.5bn, down from $32.0bn last year.

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
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 10th February 2022