On Tuesday, Coca-Cola (KO) reported strong third-quarter results that showed solid revenue expansion, volume growth, and market share gains. Overall, we liked the performance in the quarter and are maintaining our $67 fair value estimate.
Thanks primarily to the acquisition of its bottler group (Coca-Cola Enterprises), net revenue advanced about 45% from the prior-year quarter. Even though the year-over-year comparisons weren’t apples-to-apples, international volume growth was supurb, advancing 5% during the period – brand Coca-Cola led the charge outside of the US. Sparkling beverage volume grew 17% in India, 11% in Argentina, 7% in China and 6% in both Mexico and France. But even North America saw decent expansion, with organic volume growth of 1% in the period (and year-to-date).
Despite the decent revenue performance, we note that there was a 5% currency benefit in the period, which interestingly matched worldwide volume growth in the period. In other words, should currency move against Coca-Cola in future periods (which we expect to see as the US dollar strengthens), we could see a slight top-line miss in the current quarter, particularly in a scenario where volume slows from its current strong trajectory. That said, Coca-Cola possesses significant pricing power and can adjust according, particularly in North America, to mitigate any serious revenue shortfalls. For example, the company achieved 2% positive pricing to retailers in its third-quarter.
Coca-Cola’s operating income jumped 21% on a comparable basis, and this too, benefited from a 6% currency benefit. The firm’s comparable EPS jumped 12%, which management indicated was above its long-term target. The company also noted that productivity initiatives are well on track to exceed the upper end of its original target range — $500 million in annualized savings. Such operating improvements should keep earnings on the right trajectory even if currency becomes a headwind in coming periods. Plus, free cash flow continues to be steller, with operating cash flow nearly $7 billion through the first three quarters of the year. Such strong performance prompted the soft-drink giant to increase its share buyback program to $3 billion by year’s end at the high end (from $2.2 billion).
All things considered, we’re big fans of Coca-Cola’s defensive nature in this uncertain market and would consider adding the firm to the portfolio in our Best Ideas Newsletter if shares fell below $50 per share (the low end of our fair value estimate range).