Coca Cola Company (The) (KO) Com Stk USD0.25 (CDI)
HL comment (21 July 2021)
Second quarter organic revenue rose 37% to $10.1bn, reflecting a 26% increase in concentrate sales and an 11% increase due to pricing and product mix. This drove a 46% increase in underlying operating profits to $3.0bn.
The improved profit margin reflects an easing of pandemic related restrictions and uncertainty, boosting more profitable sales channels and product formats. This was partially offset by greater marketing spend.
Management upped guidance for full year organic revenue growth to between 12% and 14%.
The shares were up 1.8% in pre-market trading.
Coca-Cola is among the world's best-known brands, sold in over 200 countries and territories. Weird and wonderful variations on its world-famous brands meant sales enjoyed a long track record of growth prior to the COVID-19 pandemic. However, when bars and restaurants shut down, so did one of Coke's largest revenue streams. Supermarket sales offset this pain somewhat, but ultimately the group had to wait for lockdowns to end to get back to normality just like the rest of us.
Luckily, the group had plenty of breathing room to whether the storm. 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 has supported a gross profit margin of 60+% in normal times, which in turn has supported 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.
An uptick 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. With $500bn in annual sales globally, it's a potentially lucrative sector and Coke's got ready-to-drink cold coffees in the pipeline too. Unfortunately, lockdowns in Europe have hampered profits this year.
The Costa deal has also increased the strain on the company's balance sheet. Coca-Cola is carrying $30.7bn in net debt, which is around 2.7 times 2020 cash profits. 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 starting to make a comeback, 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 even as uncertainty persists. As ever though, nothing is guaranteed.
Coca-Cola key facts
- Price/Earnings ratio: 24.4
- 10 year average Price/Earnings ratio: 20.8
- Prospective dividend yield (next 12 months): 3.1%
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.
Second Quarter Trading Update (Constant Exchange Rates)
Revenue in Europe, Middle East & Africa rose 61% to $2.0bn, led by growth in Russia, Spain, Germany, Nigeria, Turkey and Pakistan. Operating profits rose 56% to $1.1bn. This reflects 21% volume growth, following disruption last year, as well as favourable pricing and product mix and the timing of concentrate sales.
In Latin America, revenue was up 39% to $1.1bn and profits rose to $678m from $504m. This was the result of strong growth in Brazil and Mexico and a strong performance by sparking soft drinks and the hydration category.
The recovery in fountain drinks (those served from a machine) as coronavirus worries eased, helped revenue in North America rise 28% to $3.4bn. Profits for rose 47% to $950m with away-from-home sales channels on the rebound and strong growth in premium offerings.
Asia Pacific saw revenue rise 21% to $1.5bn and profits were up 10% to $766m, reflecting the impact of more relaxed coronavirus restrictions.
Global Ventures reported revenue of $707m and swung from a $102m loss in 2020 to profits of $75m, primarily due to the reopening of Costa retail stores in the UK.
Bottling Investments posted a 29% revenue increase to $1.7bn, driven by solid growth in India and South Africa. Profits for the segment were up to $92m from $12m, helped by cost management initiatives.
Net debt fell to $30.7bn compared to $34.2bn at the start of the year, due primarily to a 32% increase in cash and equivalents.
Free cash flow was $5.1bn, a $2.8bn increase from 2020.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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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