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Commentary

We Remain Encouraged by Coke’s Cash Flow

Improved volume and pricing has helped Coke grow operating income despite currency and other headwinds, says Morningstar’s Adam Fleck.

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We're keeping our $44 fair value estimate and wide moat rating for  Coca-Cola (KO) following second-quarter results. The firm continued to see revenue decline year over year, but this was due entirely to currency headwinds and structural changes in the business (largely the firm's refranchised bottling operations); concentrate volume grew 2% and price and mix added 2% to the top line.

Although the shifting Easter holiday benefited the second quarter this year versus last, recent marketing efforts also seem to be taking hold, as systemwide unit case volume increased 2% during the first half of 2014. This figure falls at the low end of our long-run forecast, but we're encouraged that Coke seems to be making a concerted effort to drive better pricing in the North American market. As evidence, the core carbonated soft drink business saw price/mix increase 3%--following a 2% increase in the first quarter--alongside market share gains, and the region's weakness in juice stemmed from major price hikes to offset increased commodity costs. Volume growth was relatively solid in other geographies, with share gains in Eurasia and Africa, stabilized performance in Europe, and 9% volume growth in China.

Adam Fleck does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.