Second-quarter net revenue came in at $13.4bn, reflecting organic growth of 6.0% (consensus: 3.5%). The top line beat was driven by better-than-expected volume growth, with positive contributions from all regions, which more than offset weaker-than-expected price growth.
Underlying operating profit also grew 6.0%, ignoring exchange rate impacts, to $4.8bn.
Free cash flow over the first half was $6.9bn. Net debt fell by $1.6bn to $30.0bn since the beginning of the year.
Full year guidance has been raised, with net revenue expected to grow by around 5% on an organic basis (previously: 4-5%). Underlying earnings per share is now expected to rise by 7-8% (previously: 6-7%).
The shares rose 4.3% in pre-market trading.
Our view
Coca-Cola had another strong quarter, with World Cup football fever driving better-than-expected sales growth. The positive momentum has led the soft drink giant to upgrade its full-year profit outlook for the second time this year, which pleased markets in early trading.
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 eighth consecutive quarter of double-digit growth.
There’s an ongoing tax dispute with US tax authorities, with a potential $20bn 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 huge scale, largely outsourced bottling operations, 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
All ratios are sourced from LSEG Datastream, based on 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 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.
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.