After Earnings, Is Coca-Cola Stock a Buy, a Sell, or Fairly Valued? (2024)

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Coca-Cola KO released its second-quarter earnings report on July 23. Here’s Morningstar’s take on Coca-Cola’s earnings and the outlook for its stock.

Key Morningstar Metrics for Coca-Cola

• Fair Value Estimate: $60.00
• Morningstar Rating: 2 stars
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Low

What We Thought of Coca-Cola’s Q2 Earnings

• Coca-Cola posted strong second-quarter results and raised its 2024 outlook. Organic sales rose 15%, led by innovations, digital initiatives, and deft in-market executions, and adjusted EPS was up 7%.
• Even with a softer consumer backdrop in the United States and continued instability and macro challenges across Europe, Latin America, and Asia, co*ke’s performance has reinforced our favorable view that the beverage giant remains poised to fuel volume and pricing growth, aided by its total beverage portfolio approach and steadfast investments in product innovations and brand marketing.
• Volume held up (2%) in the quarter, even after a 9% price mix. We attribute the resilient trends to co*ke’s consumer-centric innovations (zero-sugar recipes, reformulated Fanta and Sprite, returnable bottles), coupled with packaging innovation and customer activation and engagement programs (including digital engagements), which tout the differentiated experiences of its wide-ranging beverage portfolio.
• Pricing looks elevated at first glance, but after we strip away impacts from hyperinflation (notably in Argentina) and a higher sales mix from vertically integrated businesses (including Fairlife), core pricing in most markets falls in the mid-single-digit range. We view this as a reasonable level to help co*ke protect its value proposition as cost pressure continues to ease.

Fair Value Estimate

We plan to raise our $60 per share fair value estimate for co*ke by a low-single-digit percentage after digesting its strong second-quarter results and updated outlook. However, we view the stock as fully valued even after the planned increase. Organic sales rose 15%, led by innovations, digital initiatives, and deft in-market executions, and adjusted earnings per share were up 7%. This was with a softer consumer backdrop in the US and continued instability and macro challenges across Europe, Latin America, and Asia.

co*ke remains poised to fuel volume and pricing growth, aided by its total beverage portfolio approach, steadfast investments in product innovation, and brand marketing. We plan to tick up our 2024 sales and adjusted EPS estimates by low-single-digit percentages to align with management’s raised guidance, while our 10-year projection for mid-single-digit sales growth and a low-30s average operating margin remains in place.

Read more about Coca-Cola’s fair value estimate.

Economic Moat Rating

We believe co*ke has built a wide moat around its global beverage operations, based on strong intangible assets and a significant cost advantage that will let it 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 32% throughout our 10-year explicit forecast, comfortably surpassing our estimate of its weighted average cost of capital at 7%.

Read more about Coca-Cola’s economic moat.

Financial Strength

We believe co*ke has a strong balance sheet and ample liquidity to weather macroeconomic volatilities and invest for long-term growth. The company had $15.2 billion in cash and short-term investments as of March 2024, $4.2 billion in backup lines of credit for general-purpose use, and a well-established commercial paper program in the US letting it 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 2-2.5 times. We expect the metric to hold at low levels in the coming years.

Read more about Coca-Cola’s financial strength.

Risk and Uncertainty

We assign co*ke 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 come under pressure as the bottlers tend to bear the brunt of cost increases. This is less of an issue in the US, 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 co*ke Femsa, that are likely in a better position to negotiate.

Non-alcoholic beverage demand tends to be resilient through economic cycles, but co*ke has high exposure to international markets (over two-thirds of both revenue and profits) that leads to stepped-up volatility within its operations—resulting from shifting macroeconomic and regulatory landscapes, currency fluctuation, and geopolitical risks—compared with domestically focused peers. The international experience of management combined with bottler collaboration globally can help the firm tackle these challenges.

Read more about Coca-Cola’s risk and uncertainty.

KO Bulls Say

• co*ke 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 co*ke and its bottlers in product planning, manufacturing, and go-to-market strategy.
• As Costa recovers from pandemic-related disruptions, it should help co*ke 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 co*ke’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 revenues from international markets, co*ke faces constant currency fluctuations that drive volatilities in reported earnings.