Long-Term Opportunity in Coca-Cola Despite Uncertainty

Investors were already expecting an ugly second quarter for wide-moat Coca-Cola KO, so we think they were looking for details about margin dynamics, given the top-line pressure, and information about the speed of recovery in major markets. The results--a beat on the bottom line and in-line sales relative to CapIQ consensus--as well as management commentary, were mixed, but we remain optimistic about the firm’s ability to manage its business during the pandemic and about the overall health of the Coca-Cola system. As we tweak our short-term estimates after the earnings report, we do not plan to change our $54 fair value estimate, and while the firm’s near-term trajectory remains murky, we still see a meaningful long-term value proposition in the shares at current levels.

Revenue came in at $7.15 billion, a decline of over 28% from a year ago, 26% of which was organic. Most of the drop (22%) came from volume, with roughly half the result of business closures and shelter-in-place orders, and more modest declines in price/mix, as adverse channels/packages were partially offset by the underperformance of finished-goods businesses. The extent of lockdown orders and exposure to businesses that might remain closed remain the biggest short-term drivers, but the firm may have a hard time catching a break even as things return to normal. For example, in a region like Latin America, organic performance is being countervailed by currency weakness.

Segment dynamics were salient at the margin lines. Despite tremendous top-line weakness, adjusted operating margins proved quite resilient, contracting just 20 basis points to 30.1% as structurally higher-margin concentrate businesses increased within the mix. While brand investments will accelerate through the rest of the year, we still expect favorable segment mix to continue supporting profitability.

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