Please ensure Javascript is enabled for purposes of website accessibility

Coca-Cola's Earnings: Outperforming Its Peers

By Greg Jones - Feb 7, 2020 at 9:16AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Coca-Cola reported better-than-expected fourth quarter earnings. This is likely to be more the rule than the exception going forward.

Coca-Cola (KO 0.76%) reported fourth-quarter earnings on Jan. 30, and they did not disappoint. Revenues and gross profits exceeded expectations, driving Coke's largest market share gains in a decade. Despite a weak market, the share price rose over 3% in response. After six years of flat growth, is Coke finally on the mend?

Coca-Cola's earnings were better than expected...

The earnings results justified the move in the stock. Organic sales in the quarter rose 7%, at the high end of guidance and above street consensus of 4.8%. Profits rose even more, as margins improved due to better price/mix and cost containment. Free cash flow for the full year came in well above the company's guidance, setting the stage for further growth in dividends and share buybacks.

Picture of a soda can being opened

Image source: Getty Images.

Coke is expecting similar growth in 2020, with projected organic growth and operating income growth of 5% and 8% respectively driving an earnings per share increase of 7%. 2020 earnings are likely to be supported by the same factors that drove results in 2019 -- strong sparkling momentum, pricing power, and innovation, with a number of new products scheduled to launch through the course of the year. Similar to 2019, Coca-Cola's estimates are on the conservative side, with the probability of upward surprise as the year progresses.

...and the medium term outlook looks positive 

After years of flat growth, what has changed for Coke? And are these changes sustainable? The company has recently made a number of strategic changes that have been instrumental in turning around its fortunes. First, by divesting a large portion of its bottling franchises, it has opted for a more capital-light and higher-margin business model. Although this has caused a decline in revenue, profitability has improved significantly, with operating profit margins rising more than 5 percentage points from 2016 to 2019. 

Coke has also been able to improve its pricing relative to its peers. A combination of utilizing smaller but more expensive packaging, as well as a willingness to raise pricing in slower-growth developed markets, has led to the company's price/mix improving 3.3% over the past three years. This is well above the peer group average of 1.8% and compares to a negative 120-basis-point gap in the period from 2011-2015.

Finally, Coke has focused more on innovation. In 2018, the company launched about 600 new products, of which more than 250 were low-or no-sugar and more than 400 were juices, teas, waters, and other non-sparkling beverages -- continuing the focus on higher-growth non-carbonated soft drink categories. Even within the sparkling category, Coke has been able to generate growth through its trademark Coca-Cola brand, with the success of product such as Coca-Cola Zero Sugar and Orange Vanilla Coke. Management estimates that product innovation contributed 17% to unit case volume versus 9% in 2015, with new products now accounting for as much as 25% of sales.

With growth on a firmer footing, Coke should be able to continue hiking its dividend -- which, at a yield of 2.7%, is well above the market's average of 1.7% or so. The company's record of increasing its dividend for 55 consecutive years qualifies Coca-Cola for an elite list known as the Dividend Kings, comprising only 28 companies with dividend growth records of 50-plus years.  No wonder Warren Buffett has stuck with this powerhouse consumer staple stock for for such a long time.   

Greg Jones owns shares of Coca-Cola. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$63.70 (0.76%) $0.48

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
389%
 
S&P 500 Returns
125%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/13/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.