Steady Pricing Growth Shows Coke’s Wide Moat

We’re maintaining our long-term outlook for wide-moat

The company’s organic revenue growth of 3%, driven entirely by price/mix, bolsters our view that the company’s brand intangible assets will allow it to exercise material pricing power over the long term. This remains in line with our long-term forecast, which calls for an average contribution from price/mix above 2% (driving more than 60% of organic revenue growth) over the next decade.

Operating margin during the quarter contracted 335 basis points to 21.4% largely due to charges related to the bottler refranchising (on a comparable basis, increasing by 375 basis points), and we plan to trim our outlook for the year, which calls for operating margin above 27%. We think our revised margin forecast will be more than offset by the time value of money, and expect the overall impact to our $46 fair value estimate to be less than 3%. Shares appear to be fairly valued.

Although unit case volumes were flat in aggregate, we were pleased to see growth in noncarbonated beverages (around 28% of unit case volume), including juice, dairy, and plant-based beverages (volumes up 3% during the quarter) and tea and coffee (2%). We’ve appreciated Coca-Cola’s efforts to expand its offerings in these categories, and events like the expansion of Honest Tea in Western Europe should further help the company diversify its product portfolio abroad. Low-sugar and no-sugar offerings also grew at a mid-single digit pace, with Coca-Cola Zero Sugar posting double-digit growth in the Europe, Middle East, and Africa and Latin America segments. We think these developments should help insulate the firm against volume declines in the event of regulatory measures to curb sugar intake, as well as secular declines in carbonated soft drink consumption in certain regions.

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