After Earnings, Is Coca-Cola Stock a Buy, a Sell, or Fairly Valued? (2024)

Coca-Cola KO reported earnings on Oct. 24. Here is Morningstar’s take on co*ke’s results and the outlook for its stock.

Key Morningstar Metrics for Coca-Cola

• Fair Value Estimate: $60.00
• Star Rating: 4 Stars
• Economic Moat Rating: Wide
• Uncertainty Rating: Low

What We Thought of Coca-Cola’s Earnings

Coca-Cola posted slightly better-than-expected third-quarter results, with organic revenues up 11% (edging our 10% estimate), while adjusted earnings per share growth of 7% matched our expectations.

co*ke nudged up its 2023 organic revenue and adjusted EPS growth guidance ranges to 10%-11% (from 9%-10%) and 7%-8% (from 5%-6%), respectively. We view this as achievable, and we are tweaking our own 2023 estimates to align with the improved outlook. Our 10-year projections for mid-single-digit sales growth and low-30s average operating margins remain in place.

The results reaffirmed our confidence in co*ke’s competitive standing and long-term outlook. Despite a 9% price increase in the quarter (10% year to date), volume (up 2%) held up well, which we attribute to consumer-centric innovations (in recipes, ingredients, and packaging), sharper brand investments (60% digital) that resonate with consumers, and astute in-market execution (including region-specific pricing and marketing events, and cooler and in-store display investments in emerging markets).

Management highlighted its priority in preserving volume growth (even in hyperinflationary markets such as Argentina and Turkey), indicating a clear focus on value proposition for the longer term, which we view as prudent. co*ke stock trades at a discount to our fair value estimate, and we suggest that long-term investors consider buying this name.

Fair Value Estimate for co*ke Stock

With its 4-star rating, we believe co*ke’s stock is undervalued compared with our long-term fair value estimate.

We are ticking up our fair value estimate to $60 per share from $58 to account for the better-than-expected results in the first half of 2023 and the time value of money. In the first six months, co*ke grew its price mix by 10% (ahead of our high-single-digit growth assumption) and still managed to hold volume steady (up 1%), thanks to product innovation and strong in-market execution in both premium and value offerings.

Strong sales trends, coupled with disciplined spending and moderating commodity cost inflation, have led us to nudge up our 2023 sales and EPS forecasts by 1.6% and 2.0% respectively. Our updated fair value estimate implies a 22 times multiple against our adjusted 2024 earnings estimate and a 2023 enterprise value/adjusted EBITDA multiple of 19 times. We continue to forecast mid-single-digit top-line and high-single-digit earnings growth over our 10-year explicit forecast period.

Read more about co*ke’s fair value estimate.

Economic Moat Rating

We award co*ke a wide economic moat. We expect its impressive brand portfolio (which underpins its pricing power and close retailer relations), coupled with scale benefits stemming from a massive global system, to reinforce its competitive position in the nonalcoholic beverage market and drive excess investment returns.

We believe co*ke has built a wide economic moat around its global beverage operations, based on strong intangible assets and a significant cost advantage that will enable the company to deliver excess investment returns above its cost of capital over and beyond the next 20 years. We have modeled the company to generate returns on invested capital that average 34% throughout the duration of our 10-year explicit forecast, comfortably surpassing our estimate of its weighted average cost of capital at 7%.

As the world’s best-known beverage company, Coca-Cola owns a strong portfolio of storied and iconic brands that resonate with consumers, making its products the beverages of choice for both at-home and away-from-home consumption occasions. The special connection co*ke cultivates and maintains with generations of consumers has enabled it to dominate the carbonated soft drink category at the core of its business (69% of the firm’s 2022 unit case volume sold). As evidenced by Beverage Digest data, co*ke commands a convincing lead in its category with a unit case volume share of 46.3% in the U.S. market in 2021, more than 20 percentage points ahead of its main competitor wide-moat PepsiCo PEP (25.6% share).

Read more about co*ke’s moat rating.

Risk and Uncertainty

We assign Coca-Cola a Low Uncertainty Rating.

We view strong bottler relationships as crucial to its business model and return profile, but in periods of high inflation, these relationships could come under pressure, as the bottlers tend to bear the brunt of cost increases. This is less of an issue in the United States, where local bottlers are small and have limited bargaining power. But in emerging markets—which hold the key to healthy volume growth—co*ke faces much larger bottlers, such as Arca Continental and co*ke Femsa, that are likely in better positions to negotiate.

Although nonalcoholic beverage demand tends to be resilient through economic cycles, co*ke has high exposure to international markets (over two-thirds of both revenue and profits) that leads to stepped-up volatility within its operations—resulting from shifting macroeconomic and regulatory landscapes, currency fluctuation, and geopolitical risks—compared with domestically focused peers. The international experience of management, combined with bottler collaboration globally, can help the firm tackle these challenges.

Read more about co*ke’s risk and uncertainty.

KO Bulls Say

• co*ke can leverage strong bottler relationships in underpenetrated emerging markets to drive volume growth with both classic recipes and new products tailored to local tastes.
• Heavy investments in a digitalized supply chain and data analytics have better aligned co*ke and its bottlers in product planning, manufacturing, and go-to-market strategy.
• As Costa recovers from pandemic-related disruptions, it should help co*ke gain a firmer footing in the coffee category and provide more consumer insights, given its global footprint.

KO Bears Say

• Secular headwinds in carbonated soft drink demand in developed markets are a challenge to co*ke’s long-term growth outlook.
• The company’s brand portfolio and product lineup in nonsparkling categories are less robust, and heavy investments are needed to bolster its competitive position.
• With two-thirds of revenues from international markets, co*ke faces constant currency fluctuations that drive volatilities in reported earnings.

This article was compiled by Tom Lauricella.