Coca-Cola Earnings: Increased Sales Drove Its Stock

• Coca-Cola beat analysts’ revenue estimate in the third quarter.
• The company’s sustained momentum in sales and improved outlook could drive its stock.

The Coca-Cola Company (KO) had an impressive sales performance in the third quarter. The company’s sales beat analysts’ expectations due to sustained momentum in the underlying business. Coca-Cola’s revenue growth rate accelerated sequentially in the third quarter. Management’s organic sales outlook improved due to strong underlying sales in the third quarter. The improved sales outlook is encouraging and could support the stock. Coca-Cola stock was trading 2.6% higher in the pre-market session.

As we discussed earlier, Coca-Cola’s third-quarter revenues benefited from higher organic sales. Increased pricing, a favorable mix, and continued volume growth in developing and emerging markets drove the company’s organic sales. The sparkling soft drinks category sustained the growth momentum due to stellar demand for Coca-Cola Zero Sugar, which had double-digit volume growth for the eighth consecutive quarter.

Coca-Cola’s management expects organic sales to increase by at least 5% in 2019. Previously, the company expected 5% growth in organic sales.

The company’s earnings were weak despite the revenue growth. Currency headwinds and the higher outstanding share count remained a drag.

Coca-Cola posted net revenues of $9.51 billion in the third quarter, which increased about 8% YoY and beat analysts’ estimate of $9.43 billion. Organic sales increased 5% due to the higher pricing and mix (+6%). However, lower concentrate sales (-2%) remained a drag.

Unit case volumes grew 2%, which reflected strong growth in developing and emerging markets. Unit case volumes also increased in North America. Sparkling soft drinks increased 2%, which reflected a continued double-digit increase in Coca-Cola Zero Sugar.

Juice, dairy, and plant-based beverages increased 1% due to the Minute Maid and Simply portfolio in North America. Water, enhanced water, and sports drinks rose 2%, which reflected growth in the Ciel and Cristal brands in Latin America. The category also benefited from growth in Dasani internationally and Kinley in India. Tea and coffee volumes increased by 4%.

Notably, higher pricing also drove PepsiCo’s (PEP) organic sales in the third quarter. The company’s organic revenues rose 4.3%, which reflected higher net pricing. PepsiCo beat analysts’ expectations in the third quarter.

Despite strong sales, the adjusted operating margin fell by 260 basis points to 28.1%, which reflected continued headwinds from currency volatility and acquisitions.

Lower margins dragged the EPS down. Coca-Cola’s adjusted EPS fell 2% to $0.56. However, the EPS was in line with analysts’ expectations.

Coca-Cola stock has risen 136% YTD (year-to-date) as of Thursday. In comparison, PepsiCo stock has risen about 24% YTD. We think that innovation and a focus on healthy drinks might continue to drive Coca-Cola’s revenues and its stock.