Coca-Cola’s first-quarter underlying net revenue rose 10% to $12.5bn ($12.2bn expected). Growth was driven by an 8% uplift in volumes, while higher prices contributed the remainder.
Underlying operating profit rose 12% to $4.3bn ($4.2bn expected). The uplift was driven by top line growth and a tight grip on costs which saw margins improve.
Free cash flow over the period was $1.8bn. Net debt rose from $29.7bn to $30.0bn over the quarter.
Full-year underlying net revenue is still expected to grow between 4-5%, with free cash flow of around $12.2bn. Underlying earnings per share (EPS) growth guidance has been raised from 5-6% to 6-7%.
The shares were up 2.6% in pre-market trading.
Our view
Coca-Cola had a strong start to the year, with first-quarter revenue and profits landing ahead of expectations. This positive momentum led the soft-drink giant to upgrade its full-year profit guidance, which markets reacted positively to on the day.
A key differentiator for Coca-Cola 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. The group 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.
When it comes to organic sales growth, we’re impressed with Coca-Cola’s continued outperformance compared to the competition. The group's diversification has undoubtedly played a large part in this, with household favourites like Fanta, Sprite, and Schweppes under its wing. But it’s the sugar-free options like Coke Zero that have been the standout performer, recording its seventh consecutive quarter of double-digit growth.
There’s an ongoing tax dispute with US tax authorities, with a potential $18bn payment on the line. Currently, Coca-Cola appears confident of at least reducing the eventual penalty. In our view, the balance sheet is strong enough to absorb any negative outcome should it occur, so we don’t feel that the dispute should cause long-term investors to overlook this drinks giant.
The Middle East conflict has the potential to disrupt supply chains, push up costs, and bring about higher inflation. We think the group’s large scale and formidable pricing power should allow it to offset these impacts through increased efficiencies and higher prices, without denting demand too much.
Coca-Cola owns one of the strongest brands in the world. Alongside its impressive profit growth and strong balance sheet, Coca-Cola remains one of our favourite names in the beverages sector. But there’s a small transition risk as the new CEO finds his feet, and any unfavourable outcome in the tax dispute could weigh on sentiment in the near 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 Sustainalytics, 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
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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 LSEG. 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.
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