VALUATION HIGHLIGHTS

1. North America constitutes 34% of the Trefis price estimate for Coca Cola's stock.
2. Latin America constitutes 27% of the Trefis price estimate for Coca Cola's stock.
3. EMEA constitutes 24% of the Trefis price estimate for Coca Cola's stock.

WHAT HAS CHANGED?

1. KO Stock Performance

   KO stock has seen little change, moving slightly from levels of $55 in early January 2021 to around $60 now (as of mid-February, 2024), vs. an increase of about 30% for the S&P 500 over this roughly 3-year period.
   Overall, the performance of KO stock with respect to the index has been quite volatile. Returns for the stock were 8% in 2021, 7% in 2022, and -7% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that KO underperformed the S&P in 2021 and 2023.



2. Latest Earnings Performance (Q4 2023)

   Coca-Cola's total revenue for Q4 2023 stood at $10.8 billion, which marks a growth of 7% y-o-y. Sales were up 12% organically, led by a 9% rise in price/mix and a 3% growth in concentrate sales. The adjusted profit for the quarter was $0.49 per share, up 10% y-o-y. The operating margin rose 40 bps to 23.1% in Q4, vs. 22.7% in the year-ago period.



3. Coca-Cola restructuring its way to more profitability

   Coca-Cola is refranchising many of its bottling operations in a bid to move away from the capital-intensive and low-margin business of bottling and focus more on the concentrate business as the consumption of carbonated drinks continues to slow down, especially in developed markets.
   In 2017, the company accomplished major milestones in three of its most important markets. The bottling businesses in China were sold; KO's two largest bottlers in Japan merged, creating a single bottler covering roughly 85% of the system; and most importantly, Coca-Cola completed the refranchising of its U.S. bottling operations.
   A bottling business comes with four to five times more revenue per drink sold and the accompanying cost. Thus, any impact on the sales of the bottler is going to have a magnified impact on overall sales for Coca-Cola and much less effect on the company's profits.
   Coca-Cola is, therefore, focusing more on capitalizing on profitability in the concentrate business and looking to refranchise some of its bottling investments.



4. Coca-Cola's First Branded Energy Drink In Europe

   In March 2019, Coca-Cola decided to release its first energy drink under the Coca-Cola brand in Europe. KO started Coca-Cola Energy in Spain and Hungary in April. The new beverage tastes like a Coke and includes caffeine from naturally-derived sources, guarana extracts, B vitamins, and no taurine. A no-sugar, no-calorie option is also available. The beverage is aimed primarily at young adults aged 18 to 35. Coca-Cola Energy is more than three times as caffeinated as a regular Coke — 80 mg of caffeine vs. 24 mg.
   

5. Acquisition of Chi Ltd

   On January 30, 2019, Coca-Cola announced the acquisition of Chi Ltd in Nigeria. Chi is recognized in West Africa as an innovative, fast-growing leader in expanding beverage categories, including juices, value-added dairy, and iced tea. It produces juice under the Chivita brand and value-added dairy under the Hollandia brand, among many other products. This acquisition further signals Coca-Cola's optimism about Africa's consumer opportunity and a commitment to its long-term investment and growth plan on the continent, where it has been present for more than 90 years.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of the Coca-Cola Company that present opportunities for upside or downside to the current Trefis price estimate:

Coca-Cola North America EBITDA Margin

• North America EBITDA Margin : While the margins had been falling in the past, they are expected to grow positively in the future as a result of the refranchising of the bottling operations, reaching 31% by the end of our forecast period. If the commodity prices rise, offsetting any benefit received from the refranchising and the margins remain at the current levels of 24%, we could see the Trefis price estimate revised downward by nearly 10%. However, if the EBITDA margins improve to 40% on account of increased cash productivity, there could be a 10% upside to our price estimate.

BUSINESS SUMMARY

The Coca-Cola Company is the world's largest beverage company, with hundreds of nonalcoholic beverage brands in sparkling soft drinks; water, enhanced water, and sports drinks; juice, dairy, and plant-based beverages; tea and coffee; and energy drinks categories. The company owns and markets four of the world's top five nonalcoholic sparkling soft drink brands: Coca-Cola, Diet Coke, Fanta, and Sprite.

KEY TRENDS

Soft drink companies adapting to changing consumer needs

Soft drink consumption is on a decline in developed countries as consumers switch to healthier alternatives such as juices, Ready-to-Drink (RTD) teas, RTD coffee, water mixers, etc. Moreover, soft drinks are prone to higher taxation due to their unhealthy nature. Hence, volume consumption is on a decline in the U.S. and Europe. Developing nations, on the other hand, offer tremendous potential in terms of volume growth. Soft drink consumption (per capita) in countries like China, India, and Brazil is still only a fraction of what it is in the developed world.

Diet soft drinks are suffering declining volumes in developed markets

Consumers have been shifting to natural and healthier beverages with less sugar and calorie content due to the health risks associated with sugary drinks. The diet counterparts have fared even worse, with the artificial sweetener aspartame being criticized for causing sugar cravings, dehydration, weight gain, and even heart diseases. Consumers have also reported bitter aftertastes of diet drinks which use the natural sweetener stevia, initially considered a bankable solution.

Coca-Cola eyeing new markets such as sparkling water

The Coca-Cola Company North America announced the acquisition of premium sparkling mineral water brand Topo Chico in the beginning of October 2017. Topo Chico will continue to be imported from Cerro del Topo Chico in northern Mexico, where it has been bottled exclusively since 1895. The company has a long history with this brand as the first Coca-Cola bottle in Mexico was manufactured at this facility. This deal has been made as a part of the company's Venturing & Emerging Brands (VEB), a business unit whose aim is to identify and nurture brands that have a billion-dollar potential. It functions like a venture capital arm of Coca-Cola that meets with brands that are mostly in the start-up phase, and which are poised for market disruption.

Given that nationally, more than $2 billion worth of bottled sparkling water is sold every year, according to consumer market researcher Information Resources Inc., it is definitely a significant market for Coca-Cola to ply its trade.

While growth in the bottled water category is expected to continue outpacing growth in the CSD category in the next few years, most of this growth will come from emerging markets such as China, Mexico, and India - where clean tap water is not as easily available.

Growing health concerns have prompted customers to reduce their consumption of calorie-filled beverages such as CSDs and juices. This has benefited the bottled water category, as some customers have switched to consuming bottled water instead of other sugary beverages. The U.S. is the fastest-growing bottled water market outside of Asia. This trend is expected to continue and, thus, boost the U.S. bottled water market size. Bottled water overtook CSDs as America's largest beverage category in volume in 2016.