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Commentary

Coke Begins Transition Year on Strong Note

Growth is likely to slow later in the year, but we believe continued productivity enhancements and growth opportunities should support high-single-digit earnings growth over the long run.

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We’re maintaining our $43 fair value estimate for  Coca-Cola (KO) after first-quarter results, as the firm is on track to meet our full-year expectations. While underlying revenue growth during the quarter was the strongest in several years (up 8% year over year, excluding a 6-point currency headwind and a point of negative M&A effects), we attribute most of this outperformance to the timing of concentrate shipments, which outpaced end-market unit case volume gains (5% growth versus 1%, respectively) due to several extra shipment days. Given management’s expectation that concentrate and unit case volume shipments should finish the year roughly in line, we anticipate slowing quarterly top-line growth. Nonetheless, Coke maintained its full-year outlook for mid-single-digit currency-neutral EPS growth, and we believe continued productivity enhancements and growth opportunities should support high-single-digit earnings growth over the long run.

Although unit case volume slowed in the quarter versus 3% gains in the fourth quarter, we remain encouraged that the firm saw growth in both sparkling and noncarbonated drinks. Within sparkling, China was a particular standout, growing 6% in the quarter, while the Eurasia and Africa segment saw 4% sparkling gains and India enjoyed double-digit growth. Despite declines in Russia, we believe the positive growth trajectory for Coke in emerging and developing markets remains intact.

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