Coca-Cola 23Q2 Results: Price Raise Doesn't Weigh on OverallSales, Full Year Guidance Exceeds Expectations

The company reported Q2 revenue of $12 billion, up 6% year-over-year, and non-GAAP EPS of $0.78, up 11%. Non-GAAP EPS was $0.78, up 11% year-over-year. Q2 organic revenue was up 11% year-over-year, compared to analysts' expectations of 8.6%. Q2 net income attributable to shareholders was $2.55 billion, up 33.5% year-over-year. Operating margin was 20.1%, compared with 20.7% a year earlier.

Coca-Cola's (KO.N) revenue and earnings per share exceeded consensus expectations.

- Adjusted Diluted EPS: Actual 78 cents, vs. 72 cents market estimate

- Adjusted Net Operating Revenue: Actual US$11.97 billion, versus market estimate of US$11.75 billion.

Organic sales grew 11% in Q2, despite the impact of geopolitical tensions and high global inflation. (Organic sales: sales excluding mergers and acquisitions, divestitures and the impact of foreign exchange rates). Over the past two years, Coca-Cola has been raising prices in response to cost increases. In the second quarter, Coca-Cola raised the overall selling price of its products by 10%, but overall sales were largely unaffected. Volume declines in Europe, the Middle East and Africa were offset by growth in Asia Pacific and Latin America.

Coca-Cola now expects comparable adjusted EPS to grow 5% to 6% in 2023, up from the previous forecast of 4% to 5%. The company also raised its organic revenue forecast, which is now expected to grow 8% to 9%, up from 7% to 8%. In the second-quarter call, management cited strong growth momentum in the current industry, with room for Coca-Cola to grow in both volume and price.

◦ Sparkling soft drinks were even, as strong performance in Asia Pacific and Latin America was offset by a decline in Europe, Middle East & Africa, primarily due to the suspension of business in Russia. Trademark Coca-Cola® was even, as strong performance in Latin America and Asia Pacific was offset by a decline in Europe, Middle East & Africa. Coca-Cola Zero Sugar® grew 5%, reflecting strong growth in Latin America and North America. Sparkling flavors declined 1%, driven by a decline in Europe, Middle East & Africa, partially offset by growth in Asia Pacific and Latin America.

◦ Juice, value-added dairy and plant-based beverages were even, as strong growth in fairlife® in the United States and Minute Maid® Pulpy in China was offset by the suspension of business in Russia.

◦ Water, sports, coffee and tea were even. Water was even, as growth in Latin America was offset by Europe, Middle East & Africa and North America. Sports drinks declined 3%, primarily driven by BODYARMOR® and Powerade® in the United States. Coffee grew 5%, primarily driven by the strong performance of Costa® coffee in the United Kingdom and China. Tea grew 1%, primarily driven by growth in Latin America, partially offset by a decline in doğadan® in Türkiye.

From a valuation perspective, Coca-Cola currently trades at a PE (TTM) of 24.1x, which is above the historical average valuation level.

Consumer demand for staple remains relatively resilient in an inflationary environment. The Coca-Cola has proven the resilience of its business model through many economic downturns. At the same time, Coca-Cola is a "Dividend Aristocrats" with 60 consecutive years of dividend growth.

Currently, Coca-Cola's long-term borrowings amount to US$35.6 billion, which is equivalent to 3.5 years of operating cash flow, and the company has a certain degree of loan repayment risk; in terms of growth and shareholder return, the company's EPS annual growth rate of 5-6%, and the return to shareholders (dividend + buybacks) of about 3%. Considering Coca-Cola's PE (TTM) multiple of 24x is higher than its historical average, the current environment of rising interest rates also makes the company's 3% dividend yield less attractive. We believe the upside for Coca-Cola is limited at this point in time and recommend investors wait for a more attractive buy point.

Weaker than expected macroeconomics; weaker than expected economic recovery; inflation and low consumer confidence