Coca Cola Company (The) (KO) Com Stk USD0.25 (CDI)
HL comment (23 April 2019)
Coca-Cola reported a 6% increase in underlying revenues in the first quarter of 2019, reaching $8bn. Sales received a two percentage point boost from increased stockpiling by bottlers to manage uncertainty related to Brexit.
Underlying margins were broadly flat at 30.5%, with earnings per share up 2% to $0.48.
The shares rose 3.6% in pre-market trading.
Coca-Cola is sold in over 200 countries, and among the world's best known brands. But Coke's far from the only tipple in the cupboard. The Coca-Cola Company owns over 500 non-alcoholic drink brands, and 20+ brands generate sales of $1bn or more a year.
For all that Coca-Cola is a surprisingly focused company. It's a marketing machine, pure and simple, and its attention is devoted to soft drinks.
Rather than investing in big manufacturing plants, Coca-Cola partners with 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 don't risk losing customers, helping offset downturns that affect demand. That pricing power supports a gross profit margin of 60+%.
Of course there have been ups and downs over the decades, including a short lived foray into films in the 1980s that saw it produce Ghostbusters and The Karate Kid among several less successful names.
The Hollywood days may be long gone, but Coca-Cola's still happy to dabble in new markets. The acquisition of Costa Coffee, puts Coke in the hot beverages market for the first time, and with $500bn in annual sales globally, it's a potentially lucrative sector.
But the Costa deal has also significantly increased the strain on the company's balance sheet. Coca-Cola is expected to finish the year with net debt of around $35bn, more than 3 times forecast EBITDA (earnings before interest, tax, depreciation and amortisation). High levels of debt increase risk, even a high quality company like Coca-Cola, and it doesn't mix well with a relatively demanding P/E ratio of 22.1.
However, over the long run the strength of the group's brands has meant shareholders have enjoyed some rich rewards. The dividend has risen every year for 56 years and remains comfortably covered by earnings, although of course that performance might not be repeated. The shares currently offer a prospective yield of 3.5%.
First Quarter Results
Coca-Cola continued to gain market share in the non-alcoholic ready to drink (NARTD) beverages market.
Organic revenues grew across all markets, with Europe, Middle East & Africa leading the way with 14% revenue growth. That included a 2% increase in volume and 10% increase in price/mix, as prices increased across the region and stockpiling in the UK improved geographic mix.
A strong performance from Brazil and price increases in Argentina ensured underlying revenue in Latin America rose 6%. North America was the slowest growing region, with revenue up just 1%, although this was offset by ongoing cost savings and the group still managed to increase market share.
The acquisition of Costa closed during the quarter, and investment in the 'total coffee' sector is expected to increase in the second quarter. That includes Costa's existing platforms as well as ready to drink products.
Cash flow from operations increased 14% to $699m, although free cash flow declined 1% to $335m following increased capital expenditure and tax payments. Net debt increased meaningfully year-on-year following the acquisition of Costa.
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