Coca-Cola’s first-quarter underlying revenue grew 9% organically to $11.2bn, ignoring exchange rates. This was well ahead of market expectations, largely driven by higher prices to help offset “intense inflation” in certain markets. All regions saw positive underlying growth.
Underlying operating profit rose 13% to $3.6bn. This uplift was a result of the top-line growth and improved margins, which more than offset increased marketing spend.
Free cash flow improved by $274mn to an inflow of $158mn. Net debt fell from $25.1bn to $21.3bn since year-end.
Full-year organic revenue and earning per share (EPS) growth guidance has been upgraded from 6-7% and 8-10% to 8-9% and 11-13% respectively.
The shares were broadly flat in pre-market trading.
Our view
Coca-Cola’s positive momentum from 2023 has spilt into the new year with underlying revenue moving higher at near double-digit rates, which was well ahead of market expectations. Higher prices to offset inflationary pressures were the main driver of top-line growth, as volumes were only marginally up. Where volumes trend from here is an area we’ll be keeping a close eye on.
A key thing differentiating Coca-Cola from most other drink makers is its 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 a lid on costs 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 continued rise in marketing spend suggests the group isn't taking its foot off the pedal. 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.
Coca-Cola's diversification has undoubtedly played a large part in its resilient sales too. The group owns other household favourites like Fanta, Sprite and Schweppes, and the acquisition of Costa Coffee put Coke in the hot beverages market for the first time. We see this as a positive add-on in a segment of the drinks market that still has room to grow.
But for all the benefits, recent acquisitions had put a slight strain on the company's balance sheet. Paying down debt levels has been a major focus of recent times and we’re now comfortable with current levels.
Alongside healthy free cash flow generation, we think the group now has plenty of room to funnel cash into other areas of the business again. We wouldn’t rule out increased share buybacks or new acquisitions in the near to medium term either. But as always, no shareholder returns are guaranteed.
Coca-Cola owns one of the strongest brands in the world, and there's a lot to be said for that in an uncertain environment. The group's valuation has come down over the last 12 months and now sits in the middle of its peer group. We think this marks an opportunity to pick up a quality company at an attractive valuation. But investors should remember nothing is immune to ups and downs, especially in the short term.
Environmental, social and governance (ESG) risk
The food and beverage industry tends to be medium-risk in terms of ESG though some segments like agriculture, tobacco and spirits fall into the high-risk category. Product governance is a key risk industry wide especially in areas with strict quality and safety requirements. Labour relations and supply chain management are also industry wide risks, with other issues varying by sub-sector.
According to Sustainalystics, Coca-Cola's management of ESG risk is strong. The group is committed to reducing its water use through targets and deadlines aiming for 100% regenerative water use in all facilities by 2030. It also offers strong human capital development programmes. However, there is potential for cases of deceptive or false advertising regarding the health benefits of the products, and this may increase as the market for healthier beverages and lower calorie alternatives continues to grow.
Coca-Cola key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. 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.
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