Long-Term Value for Coke Despite Uncertainty

Wide-moat Coca-Cola’s KO earnings print was set up to be a fraught one, with the stock’s weakness in the leadup attributable not only to the broader market sell-off but also a rare retraction of full-year guidance. Despite solid first-quarter results (top and bottom lines beat CapIQ consensus), management opted against issuing formal guidance, and its commentary seemed to portend a pretty ugly second quarter. Nevertheless, we remain confident in the Coca-Cola system's strategic advantage and believe the right tactical competencies are in place to allow the firm to navigate disparate dynamics across its territories. Uncertainty abounds in the near term, but our $54 fair value estimate is intact, and we believe the shares offer compelling value at current prices.

Reported revenue declined 1% to $8.6 billion for the quarter, largely due to one less selling day. Organic revenue was flat, as declines in Asia were offset by strength in regions like North and Latin America. Adjusted operating margins widened 250 basis points to 30.7% as the firm’s finished goods businesses (structurally lower margin due to packaging and other production requirements), like Costa and its bottling operations, underperformed relative to other concentrate-focused segments.

As the coronavirus pandemic has ravaged virtually all the firm’s markets, learnings have been far from monolithic. Even in Asia, while countries like China have slowly started to normalize, there have been fits and starts in other important markets like Japan. With social distancing mandates being enforced almost everywhere, and given the firm’s disproportionate exposure to on-premises channels, we think the worst is yet to come. We continue to expect a steady, albeit nonlinear, rebound during the second half of the year, but corollaries of the pandemic, chiefly currency weakness, will meaningfully affect the top line in 2020 (we model a mid-single-digit headwind).

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