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Undervalued Coke Shares May Be Worth a Sip

We believe in Coca-Cola's long-term earnings growth potential, but we plan to lower our fair value estimate after a tough third-quarter.


We are likely to trim our $44 fair value estimate for wide-moat  Coca-Cola (KO) about $1 or $2 to reflect near-term concerns, but overall we believe the company’s revisions to its 2020 vision only delay rather than prevent the long-term high-single-digit earnings growth potential of the business.

The firm reported top-line challenges in its third quarter, with adjusted 1% year-over-year revenue growth reflecting slowing price/mix and volume growth and further foreign currency headwinds. We're encouraged that the company continued to enjoy positive, rational pricing in the core North American sparkling beverage market, and that profitability again improved, but we caution that further top-line headwinds look to threaten this year-over-year margin improvement in the fourth quarter. As such, we continue to forecast Coke’s adjusted earnings per share (including negative currency translation) to be roughly flat versus 2013. Similarly, management estimates that currency-neutral 2015 EPS growth will also be in a mid-single-digit range.

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