Coca-Cola KO released its fourth-quarter earnings report on Feb. 11. Here’s Morningstar’s take on Coca-Cola’s earnings and stock.
Key Morningstar Metrics for KO
- Fair Value Estimate: $64.00
- Morningstar Rating: ★★
- Morningstar Economic Moat: Wide
- Morningstar Uncertainty Rating: Low
What We Thought of COKE’s Earnings
Coca-Cola KO delivered strong 2024 results, including increases of 12% in organic sales and 7% in comparable EPS. Notably, global unit case volume expanded by 1% for the year despite consumer pullback and geopolitical uncertainties. This resilient performance reaffirmed our investment thesis for Coke, underpinned by its total beverage portfolio approach, steadfast commitment to product innovations and brand investments, and strong in-market execution.
For 2025, we think management’s outlook for organic sales growth of 5%-6% looks achievable on a balanced blend of volume and price increases, but we plan to trim our adjusted EPS estimate of $3.04 by a low-single-digit percentage to incorporate higher foreign currency headwinds. We don’t plan any material changes to our $64 fair value estimate, and we view the stock as fully valued.
We attribute Coke’s 1% volume growth to strong merchandising strategies that ensure full coverage of beverage needs and occasions with relevant brands, pricing, and experiences that resonate with consumers across regions. Not surprisingly, the bulk of volume expansion came from Latin America (up 3%) and Asia Pacific (up 1%), where wider distribution, affordability tools (including returnable packaging), and digitally enhanced marketing have combined to convert and engage consumers.
The 11% rise in price and mix is high, in our view. Even after stripping away the impact from hyperinflationary markets such as Argentina and Turkey, core pricing growth of 6% is higher than Coke’s stated low-single-digit long-term target. We expect Coke to closely manage price and mix in 2025, including selectively investing in value offerings to maintain its market share. This, coupled with normalizing inflation in markets such as Argentina and benign commodity price pressure, should place Coke’s core price increases on track to moderate toward low-to-mid-single digits in the coming quarters.
Coca-Cola Stock Price
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Fair Value Estimate for Coca-Cola
With its 2-star rating, we believe Coca-Cola’s stock is overvalued compared with our long-term fair value estimate of $64 per share. Our mid-single-digit sales CAGR projection over the next 10 years is driven by strong emerging market growth (we forecast Latin America and the Asia-Pacific combined to make up 29% of overall sales by 2033, up from 23% in 2023), expansion in nonsparkling categories (water, sports, and energy drinks), and the Costa business steadily adding on offerings in the on-premises channel and for retail distribution.
Coke has historically augmented organic growth with strategic acquisitions, and we expect the company to continue doing so in the coming years. Given a lack of information about its acquisition pipeline, however, we will refrain from incorporating mergers and acquisitions deals into our financial modeling until we gain better visibility.
Coca-Cola Stock vs. Morningstar Fair Value Estimate
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Read more about KO’s fair value estimate.
Economic Moat Rating
We believe Coca-Cola has built a wide economic moat around its global beverage operations based on strong intangible assets and a significant cost advantage that will enable the company to deliver excess investment returns above its cost of capital over and beyond the next 20 years. We have modeled the company to generate returns on invested capital, including goodwill, that average 37% throughout our 10-year explicit forecast, comfortably surpassing our estimate of its weighted average cost of capital at 7%.
Read more about KO’s economic moat.
Financial Strength
We believe Coca-Cola has a strong balance sheet and ample liquidity to weather macroeconomic volatilities and invest for long-term growth. The company had $17.4 billion in cash and short-term investments on its balance sheet as of June 2024, $4.2 billion in backup lines of credit for general-purpose use, and a well-established commercial paper program in the US enabling the firm to consistently access short-term funding at low rates.
Leverage is manageable, with net debt/adjusted EBITDA at 2 times in 2023, within its long-term target of 2 to 2.5 times. We expect the metric to hold at low levels in the coming years.
Read more about KO’s financial strength.
Risk and Uncertainty
We assign Coca-Cola a Low Uncertainty Rating. We view strong bottler relationships as crucial to its business model and return profile, but in periods of high inflation, these relationships could be pressured as the bottlers tend to bear the brunt of cost increases. This is less of an issue in the United States, where local bottlers are small and have limited bargaining power. But in emerging markets—which hold the key to healthy volume growth—Coca-Cola faces much larger bottlers, such as Arca Continental and Coke Femsa, that are likely in a better position to negotiate.
Nonalcoholic beverage demand tends to be resilient through economic cycles. However, Coke has high exposure to international markets (over two-thirds of both revenue and profits), leading to stepped-up volatility within its operations compared with domestically focused peers. The international experience of management combined with bottler collaboration globally can help the firm tackle these challenges.
As consumers become increasingly health-conscious, Coke faces the challenge of reducing the health impact of its beverages without compromising on the distinct taste that sits at the core of brand loyalty. Although reformulation and revised recipes have helped slow the exodus of consumers from its sparkling drinks, the secular headwinds remain a risk that the firm will have to contend with in the coming years.
Read more about KO’s risk and uncertainty.
KO Bulls Say
- Coke can leverage strong bottler relationships in underpenetrated emerging markets to drive volume growth with classic recipes and new products tailored to local tastes.
- Heavy investments in a digitalized supply chain and data analytics have better aligned Coke and its bottlers in product planning, manufacturing, and go-to-market strategy.
- As Costa recovers from the pandemic-related disruptions, it should help Coca-Cola gain a firmer footing in the coffee category and provide more consumer insights, given its global footprint.
KO Bears Say
- Secular headwinds in carbonated soft drink demand in developed markets challenge Coke’s long-term growth outlook.
- The company’s brand portfolio and product lineup in nonsparkling categories are less robust, and heavy investments are needed to bolster its competitive position.
- With two-thirds of its revenue from international markets, Coke faces constant currency fluctuations that drive volatilities in reported earnings.
This article was compiled by Aman Dagra.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
