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Coca-Cola - earnings beat, full year guidance raised

Third quarter organic revenue grew 16% to $11.1bn, ahead of analyst expectations.

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Third quarter organic revenue grew 16% to $11.1bn, ahead of analyst expectations. Growth was broad based across geographies and driven largely by higher prices, though volumes also improved.

Underlying operating profit, ignoring the impact of exchange rates, grew 18% as higher revenue more than offset an increase in costs.

Free cash flow fell $1.2bn to $7.3bn, with the drop largely due to lower operating cash flow. Lower debt obligations meant net debt fell from $33.1bn to $29.5bn.

The group has raised full year guidance, expecting organic revenue growth of 14-15%. Previous guidance was 12-13%.

The shares rose 2.9% in pre-market trading.

View the latest Coca-Cola share price and how to deal

Our view

Beverage giant Coca-Cola is showing how and why it's such a global powerhouse. Despite the challenges of rising costs and a consumer feeling the pinch of a cost-of-living crisis, the group's been able to up its full-year expectations yet again. That's testament to the brand power, which keeps the loyal customer base coming back for more despite price hikes.

It's also testament to the 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 costs down 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. A rise in marketing spend suggests the group isn't sitting back on its laurels though. 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.

The acquisition of Costa Coffee put Coke in the hot beverages market for the first time. And it also added BODYARMOR to its stable of brands, helping to increase sales in the growing global health drinks market. We see these as positive add-ons in segments of the drinks market that still have room to grow.

For all their benefits, these acquisitions increased the strain on the company's balance sheet, Coca-Cola is carrying $29.5bn in net debt, which is slightly higher than we'd like, even for a business expected to generate over $10bn in free cash flow this year.

Over the long run shareholders have enjoyed some rich rewards, and trends look encouraging again now that restaurant and bar sales are back. Coca-Cola owns one of the best brands in the world, and there's a lot to be said for that in an uncertain environment. Though expect to pay a premium, with the group trading ahead of its long-term valuation.

Coca-Cola key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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 Refinitiv. 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. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt-Britzman
Matt Britzman
Senior Equity Analyst

Matt is a Senior Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors. He is a CFA Charterholder and also holds the Investment Management Certificate.

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Article history
Published: 25th October 2022