Coca Cola Company (The) (KO) Com Stk USD0.25 (CDI)

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Coca-Cola’s net revenue rose by 6% organically to $12.5bn, in line with market forecasts. Growth was driven largely by higher average prices, while increased volumes contributed 1 percentage point to the uplift, helped by strong Coke Zero growth.

Underlying operating profits grew by 15% to $4.0bn ignoring exchange rate impacts, slightly ahead of market forecasts. The beat was driven by a tight grip on sales and admin costs.

Free cash flow rose from $1.6bn to $2.4bn, due to the uplift in profits. Net debt was $33.5bn at quarter-end.

Full-year guidance has been reiterated, with net revenue expected to grow organically by 5-6%.

Since the period-end, the group has agreed to sell around 42% of its 67% stake in Coca-Cola Beverages Africa, the largest Coca-Cola bottler in Africa, for around $1.4bn. The deal is expected to complete by the end of 2026.

The shares rose 2.9% in pre-market trading.

Our view

Coca-Cola managed to squeeze out a small profit beat in the third quarter, helped by price hikes and a tight grip on costs. Full-year guidance now looks well within reach, and markets reacted positively on the day.

A key thing differentiating Coca-Cola from most other drink makers 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. 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.

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 fifth consecutive quarter of double-digit growth. Given consumers’ increasing appetite for healthier options, we see a long runway of growth ahead for Coke Zero and its sugar-free siblings.

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, but there’s the potential for that to change in the future, and any negative developments could swing near-term sentiment. 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.

Tariffs have unsettled global trade dynamics and have the potential to disrupt supply chains and push up costs. But given Coca-Cola’s system, with bottling plants all over the world, the impact of US tariffs looks manageable.

Coca-Cola owns one of the strongest brands in the world, and there's a lot to be said for that in an uncertain environment. Given the impressive profit growth and strong balance sheet, Coca-Cola remains one of our favourite names in the beverages sector. But investors should remember that nothing is immune to ups and downs, especially in the short 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.

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.

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