Performing opposite to the S&P 500 , Coca-Cola grows against the trend

As the world's largest beverage company, Coca-Cola has shown a relatively strong recovery after the epidemic, and the company's "Hold" rating has been reiterated by Morgan as a result of an analysis of its performance over the past year.

(1) Coke's stock has been the top performer in Morgan Stanley’s coverage group over the last year at +12%, a striking1,500 bps above the S&P 500, which has been driven mainly by consistent and large in magnitude revenue upside, averaging 580 bps vs. consensus in the last five quarters, and strong pricing power, which has driven superior margin performance vs. peers.

(2) Morgan Stanley has a high degree of conviction that Coke will post above-consensus topline growth in both 2022, as well as in 2023, with a new detailed line-item analysis. It has an expectation of 150 bps of total organic sales upside for 2023, which is substantial for a large-cap Staples name.

(1) While KO's overall AFH volumes were above 2019 levels in 4Q21 and 1Q22, AFH volumes were still below 2019 levels in several key markets, and AFH’s share of revenue was still below the 50%pre-COVID level. It’s expected continued tailwinds from AFH recovery this summer particularly based on pent-up travel demand, which is reflected in booking and credit card data.

(2) After reporting 1Q organic revenue +18% YoY using concentrate shipments and +15% YoY using unit cases, 800 bps, and 430 bps ahead of consensus, respectively, KO reiterated FY22guidance of 7-8% organic sales growth (using concentrate shipments), despite a 1-2% headwind from exiting the g business in Russia, reflecting management's confidence and visibility despite the heightened macro risk.

(3)Coca-Cola's EPS visibility is higher than peers given the 2022 revenue upside, stronger pricing power with limited demand elasticity, and a more manageable cost/demand elasticity vs. pricing gap, with a net -1% gap for Coke in 2022e vs. large-cap peers at -13%.

Coke’s valuation is still attractive. The PT is derived from a ~28x CY23 P/E multiple, at the high end of mega-cap peers given higher LT KO growth potential.