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Commentary

Coke: Not All Bad News

Coke’s third-quarter was marked by positive pricing trends, encouraging volume expansion and solid profitability, but its shares are fairly valued, writes Morningstar’s Adam Fleck.

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We're holding our $43 fair value estimate for wide-moat  Coca-Cola (KO) following third-quarter results. Positive pricing remains a critical theme, with price and mix contributing about 3 percentage points of top-line growth in the quarter (and 2 points year to date), driven by a continued rational competitive environment in North America and substantial price hikes in Latin America to mitigate negative currency impacts. We forecast 3 points of full-year price/mix contribution, continuing into the immediate to longer term as Coke increases its mix of smaller package sizes (which offer high per-ounce pricing) and enjoys a continued oligopolistic U.S. market.

We're also encouraged by Coke's volume performance in the quarter; unit case sales (a measure of end-market demand) ticked up 3% from a year ago, with noncarbonated beverages climbing a solid 6%. Carbonated soft drink volume also increased about 2%, though this was split between continued poor performance in diet drinks (Diet Coke fell 8% year over year) and positive performance in Coca-Cola (up 1%) and Coke Zero (up 8%). The company's own concentrate volume was flat in the quarter owing to intrayear timing; concentrate sales had led unit case sales earlier in the year. This led to a currency-neutral revenue organic revenue growth rate of about 3%. Year to date, concentrate sales are up about 3% but face a particularly difficult year-over-year comparison in the final quarter, leading us to maintain our full-year 1% volume growth outlook.

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