Coca-Cola's (KO 0.68%) stock barely budged after the company's recent operating update. The beverage giant this week listed new challenges that weren't obvious in its last earnings report, including accelerating inflation, geopolitical conflict, and new COVID-19 shutdowns.
Investors might have been underwhelmed when Coke just affirmed most of its 2022 outlook despite those new headwinds. But there are more reasons to like the stock today, following that report.
Let's look at the main factors driving Coke's operating rebound as management described it in their recent conference call with investors.
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The growth strategy is working
Investors were betting that Coke would enjoy a strong growth rebound, given that its business is heavily tilted toward on-the-go drinking at places like restaurants, concerts, and sporting events. These activities are being prioritized by consumers everywhere today after a long period of social distancing.
But Coke's recovery is even sharper than people expected. Organic sales soared by 18% in Q1 compared to 9% in the previous quarter. That industry rebound helped, but so did Coke's massive marketing budget, world-class distribution network, and pricing strategies.
These factors helped the company win market share in both at-home and on-the-go sales channels this quarter, which management said is "a clear indicator of the power of our new approach."
Pricing power is clear
Coke also flexed its pricing power muscles in the period. The gross profit margin rose this quarter rather than retreating under the weight of higher costs on inputs, labor, and transportation. Operating profit margin increased, too, allowing adjusted earnings to jump 16%.
That success reflects Coke's dominant industry position and unique global distribution network. Management believes these assets are critical to investor returns. "The key competitive edge of the ... system continues to be rebuilded to deliver value for our consumers and our customers in any environment," CEO James Quincey said.
Looking ahead
Coke declined to raise its 2022 outlook even though the first quarter included much faster sales and earnings growth than expected. Yet, that affirmation can be considered an effective raise given that Coke has suspended operations in Russia and seen volumes slump in China due to temporary COVID-19 lockdowns. The fact that Coke is still expecting to boost organic sales by about 8% this year -- after they spiked 16% in 2021 -- is clearly good news for shareholders.
Investors are also likely to see higher cash returns over time from dividends and stock buybacks. Coke is on track to generate $12 billion in operating cash, up significantly compared to pre-COVID-19 levels.
All these factors should mean solid returns for investors holding this blue-chip stock. Coke's business is sensitive to changes in economic growth rates, of course. But its latest operating update demonstrates it can still generate industry-leading sales and profits even as selling conditions worsen.
