Coca-Cola Co KO

Wide-moat Coca-Cola’s stock had started to crescendo in the weeks leading up to its second-quarter earnings report, suggesting that investors had finally shrugged off the issues (like its tax dispute with the IRS) that had undermined its valuation earlier in the year. To provide grist for the bulls’ theses, the firm reported a knockout quarter, with sales and earnings ahead of FactSet consensus. While the comps the firm faced were undoubtedly soft, commercial momentum and management’s increasing visibility into the contours of the economic recovery manifested in increased top-line guidance for the year (12%-14% organic growth versus high single digits previously). We plan to raise our fair value estimate to $58 from $55 to reflect time value and increased guidance, partially offset by higher taxes as we incorporate Morningstar’s probability-weighted expectation that the U.S. statutory rate will rise to 26%. This does not contemplate structural changes that could ensue from Coca-Cola’s current tax litigation, but our view remains that this situation will take a while to resolve, and the worst possible outcome is unlikely. With shares rallying and risks appearing balanced, we don’t see a compelling margin of safety currently.