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Coke Still Has Room to Boost Profitability, But Shares Fairly Valued

Cost-savings programs, improved pricing, and bottling divestitures should drive near- and long-term margin expansion at wide-moat Coke, writes Morningstar’s Adam Fleck.


We don’t expect much change to our $43 per share fair value estimate for  Coca-Cola (KO) after examining the firm’s fourth-quarter results and plans to accelerate its bottling divestitures. Unit case volume growth finished the year strong, with 3% year-over-year gains in the second half of the year versus 1% to 2% in the first half; non-carbonated beverages continued to lead this improvement, climbing 6% in the quarter and 5% for the year. Shipment timing issues and fewer calendar days in this year’s fourth quarter led to Coke’s reported volume falling about 3% in the period, but we believe case volume is a better indicator of underlying demand. That said, the firm’s total reported volume grew 1% in the year, in line with our expectations.

We believe this volume growth, combined with positive pricing, supports our wide-moat rating for Coca-Cola. Price and mix lifted sales about 2% in the quarter and the full year, the strongest annual performance since 2011. We expect continued contribution from this metric at roughly 3% per year, owing to a further push in reduced package sizes (which drive up price per ounce), increased marketing spending, and rising consumer incomes in developing markets.

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