Company Reports

We are transferring coverage of two of The Coca-Cola Company's largest bottlers Coca-Cola Europacific Partners and Coca-Cola HBC. For CCEP, we are raising our fair value estimate to EUR 60 from EUR 56 and for CCHBC, we are lowering our fair value estimate to GBX 2,440 from GBX 2,800. Our current valuations place shares in 2-star territory for both firms as we think the market is overly optimistic on medium-term growth prospects. We maintain our narrow moat rating, Standard Morningstar Capital Allocation Rating, and Medium Morningstar Uncertainty Rating for both firms.

Since its asset swap with The Coca-Cola Company in 2010, Coca-Cola Europacific Partners has been transformed through a series of acquisitions from a US bottler to Coca-Cola's second-largest distribution partner by volume and largest by revenue in 2023, with territories in Europe, Asia, and Australasia.

Narrow-moat Coca-Cola Euro-Pacific Partners posted solid first-half results, with revenue in constant currency up 3.5% and adjusted operating profits up 9%. Pricing rose 2.9% thanks to favorable product mix and in-market execution, while volume held up (up 0.6%) on strong performance in the Philippines, which more than offset soft European volumes due to poor weather and persistent macro headwinds. Management reaffirmed 2024 guidance for constant-currency comparable sales and operating profits to grow 4% and 7%, respectively, which we view as attainable. We're maintaining our estimates for mid-single-digit annual sales growth and operating margins averaging 14% over the five-year forecast horizon, and our fair value estimates of EUR 56 and $60 remain in place. Shares look overvalued.

Narrow-moat Coca-Cola Euro-Pacific Partners posted a strong first-quarter trading update, with volumes up 7.9% and constant-currency revenue up 8.4%. The bottler’s efforts to diversify regional exposure paid off, as double-digit expansion in Asia Pacific (30% of total volume), especially in the newer territories of the Philippines and Indonesia, led comparable volume growth. Meanwhile, volumes remained resilient in Europe (down 1%) despite a soft consumer backdrop and the pruning of low-margin products, including water and Capri-Sun fruit juice. We are maintaining our estimates for mid-single-digit sales compound annual growth rate, and operating margins averaging 14% over the five-year forecast horizon. Our fair value estimates of EUR 56 and $60 remain in place. Shares look overvalued.

Europe-based Coca-Cola Europacific Partners, or CCEP, and Coca-Cola Hellenic Bottling Company, or CCHBC, rank as the second- and third-largest Coke bottlers globally by volume, and both earn a narrow economic moat rating based on strong route-to-market operations in their authorized territories. We don't foresee material differences in the two bottlers' top-line growth—both are at 4% annually excluding acquisitions—and cash conversion—free cash flows to the firm averaging 6% and 7% of sales, respectively—over the next five years. However, the CCEP stock currently trades at a 12% premium to our EUR 56 fair value estimate, while CCHBC trades at a 15% discount to our GBX 2800-per-share intrinsic valuation. We think the market is underestimating CCHBC's growth and earnings power, and we consequently view CCHBC's shares as attractive.

Since its asset swap with The Coca-Cola Company, or TCCC, in 2010, Coca-Cola Europacific Partners, or CCEP, has been transformed through a series of acquisitions from a US bottler to Coca-Cola's second-largest distribution partner by volume and largest by revenue in 2023, with territories in Northern Europe, Asia, and Australasia.

Since its asset swap with The Coca-Cola Company, or TCCC, in 2010, Coca-Cola Europacific Partners, or CCEP, has been transformed through a series of acquisitions from a U.S. bottler to Coca-Cola's second-largest distribution partner by volume and largest by revenue in 2023, with territories in Northern Europe, Asia, and Australasia.

Since its asset swap with The Coca-Cola Company, or TCCC, in 2010, Coca-Cola Europacific Partners, or CCEP, has been transformed through a series of acquisitions from a U.S. bottler to Coca-Cola's second-largest distribution partner by volume and largest by revenue in 2022, with territories in Northern Europe, Asia, and Australasia.

We are initiating coverage of two of The Coca-Cola Company's largest bottlers Coca-Cola Europacific Partners, or CCEP, and Coca-Cola HBC, or CCHBC, with fair value estimates of EUR 54 and GBP 26 per share, respectively. Both firms have strong business models, and we award them narrow moat ratings, but we do not believe that current market valuations provide an appropriate risk/reward opportunity. At present, we see more value in Latin American bottler Coca-Cola Femsa, or CCF, a wide moat firm with 10% upside to our fair value estimate as of Dec. 4. We would own CCEP and CCHBC at the right price, but we recommend waiting for a more attractive entry point.