Stock of the week - Coca-Cola (15.02.2024)

• Coca-Cola reported Q4 2023 earnings on Tuesday
• Results came mostly in-line with expectations
• Better-than-expected sales in EMEA and Latin America
• Organic revenue growth hints at underlying strength
• Sales growth continues to be driven primarily by price increases
• Volume growth started to pick-up
• A look at 3 valuation models

Coca-Cola (KO.US) reported Q4 2023 results on Tuesday before the opening of the Wall Street cash session. Results came in mostly in-line with market expectations, but there were some positive surprises. Overall, release hints at strength in underlying business, while details point to improvement in actual demand. Let's take a quick look at Coca-Cola earnings and company's valuation.

Fourth quarter earnings mostly in-line with expectations

Q4 2023 earnings release from Coca-Cola did not include any major surprises. Results came in mostly in-line with market expectations. Revenue was slightly higher than expected, mostly thanks to higher-than-expected sales in EMEA and Latin America segments. Positive price/mix impact was bigger than expected but smaller than a year ago. Margins improved, while operating profit beat expectations slightly. Comparable EPS grew almost 9% from a year ago and came in-line with expectations. A highlight of Q4 results was very strong organic revenue growth of 12% that shows underlying strength in Coca-Cola's business.

Guidance for the full-2024 surprised to the upside slightly but was still deemed as conservative by analysts. This makes it achievable and leaves a scope for positive surprise should consumer demand improve along with falling inflation and potential for lower interest rates.

Q4 2023 earnings

• Adjusted operating revenue: $10.85 billion vs $10.65 billion expected (+6.4% YoY)
• Unit case volume growth: +2%
  • Nutrition, juice, dairy and plant-based beverages: +6%
  • Sparkling soft drinks: +2%
  • Water, sports, coffee and tea: 0%
• Price/mix: +9% vs +6.4% expected (12% a year ago)
• Change in concentrate sales: +3% vs +2.5% expected
• Adjusted organic revenue: +12% vs +8.8% expected
• Business revenue breakdown
  • Bottling Investments: $2.01 billion vs $2.0 billion expected (+1.6% YoY)
  • Global Ventures: $813 million vs $808 million expected (+9.9% YoY)
  • Corporate: $31 million vs $22.6 million expected (+82.4% YoY)
  • Eliminations: -$345 million vs -$350 million expected
• Regional revenue breakdown
  • North America: $4.04 billion vs $4.04 billion expected (+4.9% YoY)
  • Europe, Middle East & Africa: $1.72 billion vs $1.61 billion expected (+10.6% YoY)
  • Asia-Pacific: $1.16 billion vs $1.07 billion expected (+9.6% YoY)
  • Latin America: $1.49 billion vs $1.45 billion expected (+15.8% YoY)
• Adjusted gross margin: 57.8% vs 57.2% expected (56.5% a year ago)
• Adjusted operating income: $2.53 billion vs $2.47 billion expected (+9.1% YoY)
• Capital expenditures: $851 million vs $856 million expected (+20.2% YoY)
• Comparable EPS: $0.49 vs $0.49 expected ($0.45 a year ago)

Full 2024 forecasts

• Adjusted organic revenue growth: 6-7% vs 5.9% expected
• Comparable EPS growth: 4-5%

Financial dashboard for Coca-Cola. Source: Bloomberg Finance LP, XTB Research

Price increases drive sales growth

We have mentioned in the previous section that analysts pointed to strength in underlying business. It is not a secret that Coca-Cola's sales growth has been driven primarily by price increase in recent quarters, with volume growth lagging significantly. However, volume growth has picked-up in the two most recent quarters and reach 3% in Q4 2023. This is a positive development, showing that actual demand for Coca-Cola's products is increasing. Volume growth in Latin America was the strongest among the company's major geographic regions, with a 4% increase, followed by 1% and 2% increases in EMEA and Asia-Pacific, respectively. On the other hand, sales volume dropped 1% in North America, Coca-Cola's most important region in terms of revenue.

Coca-Cola's sales growth continues to be driven primarily by price increases, but volume growth began to pick-up recently. Source: Bloomberg Finance LP, XTB Research

A look at valuation

Let's take a quick look at Coca-Cola's valuation with 3 often used valuation methods - DCF, multiples and Gordon Growth Model. We want to stress that those valuations are for presentation purposes only and should not be viewed as recommendations or target prices.

Discount Cash Flow method

Let's start with probably the most popular fundamental model for valuing stocks - Discounted Cash Flow method (DCF). This model relies on a number of assumptions. We have decided to take a simplified approach and base those assumptions on averages for the past 5-years. Detailed forecasts for 10 years were made, with terminal value assumptions being set as follows - 3% terminal revenue growth and 7% terminal weighted cost of capital (WACC). Such a set of assumptions provides us with an intrinsic value of Coca-Cola's shares of $68.66 - or almost 16% above yesterday's cash close. Terminal value forecast accounts for 72% of DCF valuation.

A point to note is that the intrinsic value obtained via the DCF method is highly sensitive to assumptions made. Two sensitivity matrices are provided below - one for different sets of Operating Margin and Revenue Growth assumptions and the other for different sets of Terminal WACC and Terminal Revenue Growth assumptions.

Source: Bloomberg Finance LP, XTB Research

Source: Bloomberg Finance LP, XTB Research

Multiples

Next, let's take a look at how Coca-Cola's valuation compares with peers. We have constructed a peer group consisting of PepsiCo, Monster Beverage, Keurig Dr Pepper, Constellation Brands, Celsius Holdings and National Beverage - 6 US public beverages companies. We have taken a look at 6 different valuation multiples - P/E, P/BV, P/S, P/FCF, EV/Sales and EV/EBITDA.

Taking a look at the table below, we can see that there is some volatility in multiples for Coca-Cola peers, especially in the case of P/E, P/FCF and EV/EBITDA multiple, with Celsius Holdings being a clear outlier. Having said that, mean multiples are somewhat distorted, and we have decided to use medians. Using median multiples provides us with valuations ranging from $43.19 in case of EV/EBITDA multiple to $68.85 in case of P/FCF multiple. A trimmed mean (excluding the highest and lowest valuations) provides us with an intrinsic value of $52.46 per share, or around 11.5% below yesterday's cash closing price.

Source: Bloomberg Finance LP, XTB Research

Gordon Growth Model

As a company with a long track record of dividend payouts and has been increasing dividends for over 60 consecutive years, Coca-Cola can be valued used a Gordon Growth Model - valuation method based on dividends. We have assumed an 5% dividend growth rate as well as 8% required rate of return based on averages and trends for the past 5-years. Running a model with such assumptions leads us to an intrinsic value of $64.40 per share, or around 8.5% above yesterday's closing price.

As it is usually the case with valuation models, the Gordon Growth Model is also highly sensitive to assumptions made. Sensitivity matrix for dividend growth and required rate of return assumptions is provided below. Green tiles show combinations that result in above-market valuation, and red tiles show combinations that result in below-market valuations.

Source: Bloomberg Finance LP, XTB Research

A look at the chart

Share price of Coca-Cola has been quite volatile during the post-earnings trading session. Stock trade as much as 1.5% higher at one point of the cash session and as much as 1.5% lower at the other, before ultimately finishing trading around 0.6% lower (orange circle on the chart below).

Taking a look at Coca-Cola chart (KO.US) at D1 interval, we can see that the share price has been trading sideways over the past two years with a slightly bearish twist. A recent attempt at breaking above the downward trendline turned out to be a failure. Stock continues to trade in the vicinity of the 200-session moving average (purple line). The $58.75 area is the near-term support zone to watch and is marked with previous price reactions. Near-term resistance is marked with the aforementioned downward trendline, which currently runs in the $60.85 area.

Source: xStation5