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Coca-Cola Expected to Have Strong Quarter despite Price Increase

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4.6

Andrew R. Michaud

• February 12, 2024

Coca-Cola, the renowned beverage giant, is expected to showcase another impressive quarter in its upcoming earnings report, as consumers persist in purchasing its drinks despite the increase in prices.

The company is set to release its fourth-quarter results before the market opens on Tuesday.

Wall Street analysts project that Coca-Cola will record $10.7 billion in net revenue for the last three months of 2023, reflecting a 4.7% growth compared to the previous year. Earnings are expected to reach 49 cents per share, an 8.9% increase from the same quarter in the prior year.

Coca-Cola demonstrated substantial growth in the third quarter, experiencing an 8% year-on-year increase in net revenue and a 7% growth in earnings.

Despite inflationary pressures over the past two years, the beverage giant efficiently passed on most of its rising costs to consumers without significant negative impact on its business.

In the third quarter, Coca-Cola products were priced 9% higher than the previous year across all six segments. Surprisingly, sales volume actually increased by 2% instead of declining.

The growth was particularly robust in Latin America, where organic revenue surged by 20% compared to the same period last year. Higher prices contributed 15 percentage points to this growth, while an increase in unit case volume accounted for 5 percentage points.

Even in mature markets such as North America, a 6% price hike did not deter consumers from purchasing Coca-Cola's products. Sales remained consistent with the previous year.

Following better-than-expected third-quarter results, Coca-Cola raised its full-year revenue forecast for 2023 to a range of 10% to 11%, surpassing its prior projection of 8% to 9%. The company also expects earnings-per-share growth of 7% to 8%, up from the previous guidance of 5% to 6%.

However, management did express concerns about consumers potentially facing economic pressures. Analysts anticipate that Coca-Cola's sales in North America will grow by 5.4% compared to the prior year, with Latin American revenue projected to rise by 11% in the fourth quarter.

The Impact of Currency and Market Concerns on Coca-Cola's 2023 Earnings

A forecasted 6% headwind to the multinational company's 2023 earnings is expected due to a stronger dollar and weaker foreign currency. This company generates two-thirds of its revenue from overseas markets.

Concerns and Stock Performance

Investors have shown limited enthusiasm for Coca-Cola's stock, despite its strong growth. Last year, share prices experienced a 15% decline from July to early October. However, the stock has since regained much of its losses. As of Monday's close, it is still trading 2% lower compared to a year ago.

These concerns stem from worries that the Federal Reserve's rate hike cycle could stretch consumer wallets too thin for discretionary spending. Additionally, the emergence of new obesity drugs, such as Novo Nordisk's Ozempic, raises concerns about reduced consumer appetite for snacks and potential sales declines for food companies.

Analyst Perspective and Potential Growth

Despite these concerns, Wall Street analysts appear optimistic about Coca-Cola. More than 80% of analysts polled by FactSet maintain a Buy rating on the stock, with an average price target of $65.70. This suggests an 11% upside from the current level.

However, food companies face real risks as inflation cools down, potentially impacting their growth engines over the past two years. If sales volume declines alongside inflation, the top-line growth for these companies could significantly shrink or even disappear altogether.

Comparison to PepsiCo's Performance

In light of the recent surprise drop in sales reported by PepsiCo during the fourth quarter, investors are closely monitoring whether Coca-Cola can sustain its momentum and prove that consumers are still willing to purchase its products, even in the face of higher prices.