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Coca-Cola Adjusts Outlook Following Mixed Q3 Results
On Thursday, BNP Paribas Exane revised its forecast for Coca-Cola, decreasing its price target from $78.00 to $76.00 while keeping an Outperform rating. This change comes in light of Coca-Cola’s recent third-quarter performance, which, although featuring beats on both revenue and earnings, raised concerns about sales volume.
The beverage giant reported organic sales growth (OSG) of 9%, exceeding the predicted 6.3%, and earnings per share (EPS) of $0.77, which surpassed the expected $0.74. However, Coca-Cola did experience a slight 1% decrease in unit case volume, contrasting with analysts’ expectations for a 0.5% growth.
Interestingly, the year’s performance varied significantly between developed and emerging markets. Regions such as North America, Europe, Japan, and Australia performed notably better than Latin America, India, China, and the Middle East. Coca-Cola indicated that it had seen improvements in volume after a weak start in July and anticipates a return to stability and normalization as it moves into fiscal year 2025.
For fiscal year 2024, Coca-Cola has upgraded its OSG forecast to approximately 10%, slightly above the prior range of 9-10%, aligning with market predictions. This uptick is principally attributed to pricing strategies in areas experiencing notable inflation. The overall EPS growth remains projected at 5-6%, suggesting an EPS range of about $2.82 to $2.85, consistent with market forecasts.
BNP Paribas Exane’s downward adjustment in EPS estimates and price target for the 2025-2026 financial years is attributed to a more challenging foreign exchange landscape. Still, the firm highlighted Coca-Cola as a key choice in the beverage sector. The firm’s valuation appears rooted in a probability-weighted analysis of potential legal outcomes, applying a price-to-earnings ratio of 25 times for the next year, while the stock is currently trading at approximately 24.5 times earnings. The company’s favorable long-term outlook is driven by its robust product lineup, market share growth, capital return expectations, and a strengthened financial stance resulting from bottler refranchising initiatives.
In other relevant updates, Coca-Cola’s third-quarter results showed a dramatic 9% increase in organic revenue alongside a 5% rise in comparable EPS to $0.77, despite enduring a 1% dip in volume. Jefferies and Morgan Stanley have also adjusted their price targets for the company to $77.00 and $76.00, respectively, underlining their confidence in Coca-Cola’s strong fundamentals and pricing capabilities. Furthermore, Coca-Cola has notably made a $6 billion tax payment to the IRS related to an ongoing dispute.
The company has recently tweaked its 2024 guidance, now expecting around 10% organic revenue growth alongside a 14% to 15% increase in EPS. Its Fairlife brand has thrived, exceeding $1 billion in retail sales and significantly boosting North American revenue. However, it forecasts about a 6% growth in organic sales for Q4, a decrease from Q3’s performance.
Analysts from Goldman Sachs and JPMorgan have acknowledged Coca-Cola’s strong organic sales trajectory while also seeking clarification on Q4 growth expectations and regulatory influences in Mexico. Despite facing pressures from higher interest costs and foreign exchange issues, Coca-Cola is deemed to have effective mechanisms in place to navigate these challenges, maintaining a positive outlook on EPS growth.
InvestingPro Insights
Coca-Cola’s financial stability and industry positioning provide a detailed context for BNP Paribas Exane’s assessments. According to InvestingPro data, Coca-Cola’s market capitalization stands at $288.85 billion, highlighting its prominence in the beverage sector. The company’s impressive gross profit margin of 60.43% over the last twelve months ending Q3 2024 illustrates operational efficiency, resonating with InvestingPro’s observations on “impressive gross profit margins.”
Investors may find value in knowing Coca-Cola has raised its dividend for an astounding 54 consecutive years, reinforcing its dedication to delivering shareholder returns. This steady dividend growth, paired with a current yield of 2.85%, may interest income-focused investors despite the recent price target revision.
Though BNP Paribas Exane maintains an Outperform rating, it is essential to consider the stock’s elevated EBITDA and revenue multiples noted by InvestingPro Tips. This situation may indicate that the market has factored in much of Coca-Cola’s strong performance and positive expectations into its current valuation.
InvestingPro also offers an array of additional insights, providing investors a more complete picture of Coca-Cola’s financial performance and competitive standing.
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