Wide-Moat Coca-Cola Beat Q4 Organic Revenue Growth Expectations

Coca-Cola Stock at a Glance

• Current Morningstar Fair Value Estimate: $58
• Coca-Cola Stock Star Rating: 2 Stars
• Economic Moat Rating: Wide
• Moat Trend Rating: Stable

Coca-Cola Earnings Update

Wide-moat Coca-Cola KO posted better-than-expected organic revenue growth (15% versus our 12% forecast) in the fourth quarter that reaffirmed our view that the firm is poised to drive sales expansion through digital campaigns and a sharp focus on emerging markets (20% of sales). Adjusted EPS of $0.45 was a touch shy of our $0.47 estimate due to higher interest expenses from the floating rate debt. We are maintaining our $58 fair value estimate after incorporating the latest results in our valuation and view the shares as fairly valued.

We view the 12% price/mix increase in the quarter as testament to Coke’s ability to foster consumer connection and assert its value proposition through effective marketing. Global digital campaigns during the FIFA World Cup 2022, and localized food and music events catering to consumers in Cambodia and Brazil, are highlights in the quarter that not only deepened consumer engagement but also unlocked more away-from-home consumption occasions that carry a higher price mix. The flat volume was held back by a weak Europe (as expected) and China under COVID-19 restrictions, which we expect to improve in 2023 on the back of China reopening and investments (in brands and distribution) in Latin America and emerging Asia.

On the margin front, we are impressed by Coke’s ability to hold Q4 underlying gross margin (57.4%) flat year over year by offsetting double-digit cost inflation in commodities with pricing and point of sale execution. Better leverage of marketing expenses was the key driver behind the 132-basis-point expansion in underlying operating margins to 23.4% from the year-ago quarter. As we expect Coke to continue prioritizing investments behind brands to fortify its competitive position, especially in emerging markets, where we expect the bulk of incremental volume growth to come from, we model advertising and marketing spending to average 11% of sales over the next 10 years and maintain operating margin assumptions at around 30%.