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Coke Still on Track; Shares Fully Valued

First-quarter revenue growth for the wide-moat beverage maker trailed our full-year estimates, but we expect growth to increase later in the year, writes Morningstar's Adam Fleck.


Wide-moat  Coca-Cola’s (KO) first-quarter results were in line with our expectations, with low-single-digit volume and price/mix contributions combining to drive roughly 3% organic top-line growth. While this figure trails our 4% full-year outlook, we attribute this underperformance largely to geographic mix shift, given higher growth in countries that have lower average product pricing, particularly in the Asia-Pacific segment. For the full year, we expect some top-line acceleration as recently launched global marketing efforts take hold, leading to 4% full-year top-line growth (in line with management’s 4%-5% outlook). We will likely raise our $43 fair value estimate by $1-$2 to account for the time value of money, but we don’t anticipate major changes to our underlying long-term assumptions.

We’re encouraged by the firm’s North American performance, where continued solid noncarbonated beverage volume performance (up 5%) more than offset flat soda volumes, while pricing added an additional three points of growth. This price performance outpaced PepsiCo’s 1% quarterly result, though we attribute some of this outperformance to timing and mix differences at Pepsi. Over the longer term, we expect both Pepsi and Coke to remain committed to rational pricing in the U.S. market, leading to 2%-3% price and mix contribution at each company.

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