Coca-Cola Co. (KO, Financial) has been growing nicely despite moderate unit volume gains, led by price increases. However, as consumers start to show price increase fatigue, volume growth should come more into play in the future.
Company profile
Coca-Cola owns a number of beverage brands in the soft drink, sports drink, energy drink, water, coffee, tea and juice categories. Its brands include Coca-Cola, Sprite, Fanta, Powerade, Dasani, Vitaminwater, Costa and Minute Maid, among others.
The company's products are sold in over 200 countries and territories. It sells its concentrates and syrups to independent bottling partners, as well as finished products to wholesalers, distirbutors and retailers.
Opportunities and risks
Coca-Cola has long been one of Warren Buffett (Trades, Portfolio)'s and Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) largest holdings, most recently representing about 6.80% of the insurance giant's investment portfolio. The guru originally bought the stock back in 1988 and has held on ever since.
So what made Coca-Cola attractive to Buffett and other investors? First and foremost, the Coke brand is one of the most recognizable brands around the globe. It is the clear leader in the soft drink category with five of the top six global soft drink brands in the world. Brands are valuable, and there are not many as big as Coca-Cola in the food and beverage space.
While overall global unit case volume growth has been modest, up only 2% in 2023 after 5% growth in 2022, what the company has shown is a lot of pricing power. Price and mix accounted for 10% growth in 2023 and 11% in 2022. As a result, Coca-Cola has seen strong organic revenue growth the past two years of 16% and 12%. It is looking for 6% to 7% organic growth in 2024.
Latin America has been an area of particular strength for the company in recent years, with unit case volumes up 6% in 2022 and 5% in 2023, and concentrate sales up 7% in 2022 and 6% in 2023. This strength continued in the fourth quarter of 2023, with unit case volumes up 4% and concentrate sales up 10%.
Coca-Cola will also look to boost sales through its first new permanent soft drink flavor in quite some time. Over the past several years, it has offered some limited-edition flavors, but it recently announced Coca-Cola Spiced will become a permeant addition to its soft-drink roster to help connect with younger consumers whose tastes have shifted from older generations.
The company is also in the process of refranchising its company-owned bottling operations. The goal is to not only get cash for the deals, but to have it boost margins as well. Soda makers seem to go through phases of vertical integration and then selling off their company-owned bottlers. Coca-Cola is in the selling off phase at the moment.
According to Bloomberg, the company is also eyeing its first big acquisition in years, looking to acquire healthy soda brand Poppi. The upstart beverage company recently turned heads with its first Superbowl advertisement claiming that soda will no longer be considered a dirty word. Coca-Cola has a strong track record with acquisitions, and if it acquires the company, would likely be able to accelerate the brand's growth given its huge distribution network.
When it comes to risks, soda has certainly lost some share over the years to other beverage categories, including energy drinks and sparkling water. Soda has become linked to health issues, even diet versions, which has changed drinking habits in places like the U.S. and other areas, especially with younger generations. This should be a continued headwind in more developed markets.
Meanwhile, Coca-Cola has taken a lot of price over the past few years. While it has shown pricing power, it may not be able to continue to increase prices at the same rate going forward. McDonald's (MCD, Financial), for example, has said it is seeing some backlash from its customers over prices. All in all, it seems consumers are getting fed up with the rate of price increases throughout the consumer staple space.
Valuation
Coca-Cola's stock currently trades at 17.40 times the 2024 consensus Ebitda of $15.28 billion and 16.30 times the 2025 consensus of $16.30 billion.
It trades at a forward price-earnings ratio of 21 based on the 2024 consensus of $2.81 and nearly 20 times the 2025 consensus of $3.01.
It is projected to grow revenue by 0.40% this year and 4.90% in 2025. Its bottler refranchising will cut into revenue in 2024, which is why its organic revenue growth is projected to be higher.
Coca-Cola trades at premium to its two soda peers, PepsiCo (PEP, Financial) and Keurig Dr Pepper (KDP, Financial), despite expected slower revenue growth.
Historically, over the last several years, it has traded between 17 and 22 times enterprise value/Ebitda. That would place a fair value on the stock based on 2025 Ebitda of between $62 and $81, with a midpoint of $71.50.
Conclusion
Coca-Cola has put together some solid revenue growth the past three years coming out of the pandemic. However, with consumers starting to push back on prices caused by high inflation, volume will likely start to come more into play over the new few years.
The company will likely continue to carry a premium valuation given its brand power, but the growth of the past few years should start to slow down in the coming years. This could lead it to trade closer to the lower end of its recent historical multiple range.
