Coca-Cola Powers Up Its Sports Drink Business

On Nov. 1, Coca-Cola KO confirmed it inked a deal to acquire the remaining 85% of BodyArmor (a manufacturer of caffeinated and decaffeinated sports drinks and alkaline water) for $5.6 billion, marking the largest brand tie-up in the firm's history. While the deal appears a touch rich at first blush, at a mid-single-digit level of sales, we attribute the price tag to the brand's robust growth characteristics (50% annual growth in U.S. retail sales) and its standing as the second-largest player in the more than $8 billion domestic sports drink market behind wide-moat PepsiCo's Gatorade brand (which we estimate controls more than 60% of the category). While Coca-Cola has been prudently parting ways with peripheral brands in order to focus its resources (both financial and personnel) on core vectors for growth such as premium beverages and energy drinks, we view this transaction as supportive of this pursuit, as it stands to amplify its position beyond the mature soda category, which continues to face secular headwinds in many markets. However, we don't anticipate a material change to our $58 fair value estimate, given the deal stands to represent just a low-single-digit percentage of its sales base. With shares trading in line with our intrinsic valuation, we think investors should await a more attractive opportunity before building a position in the wide-moat name. The deal is slated to be funded with cash on hand (which stood at more than $11 billion on Oct. 1) and with its stalwart balance sheet and robust cash generation (historically in the high-teens to low-20s range as a percentage of sales). We see little reason to alter our Exemplary capital allocation rating on the business. In this context, we suspect that returning excess cash to shareholders will remain a key priority for cash, and we continue to forecast Coca-Cola will grow its dividend payment (which currently yields around 3%) at a high-single-digit clip on average annually through fiscal 2025.

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