We Expect Bounceback Year From Coca-Cola in 2021


After rebounding from the March 2020 trough late last year, shares of wide-moat Coke (KO) were again under pressure in recent weeks. This was ostensibly due to an adverse tax judgment, as well as the specter of a structurally higher effective tax rate going forward. Consequently, heading into its fourth-quarter earnings, we think investors were primarily looking for: any inkling as to the magnitude of the potential liability, and visibility into the prospects for the business in 2021. The results were decent (in line on revenue and ahead on earnings relative to FactSet consensus), and while the first quarter is off to a rocky start with renewed on-premises closures, we still believe the commercial backdrop should be favorable as we progress through the year. Regarding taxes, the new disclosures lent credence, we believe, to our standing hypothesis: it is difficult to conjure a scenario where the litigation outcome justifies the destruction in economic value implied by the market. Ultimately, after rolling our model and weighing the puts and takes in near-term guidance, we don’t plan to change our $54 fair value estimate. For investors seeking exposure to a high-quality staple, we currently see a sufficient margin of safety in the stock.

Revenue came in at $8.6 billion, down 5% year over year. Organically, sales fell 3%, entirely attributable to price/mix, with flat concentrate volume (three points ahead of unit cases due to extra selling days and the cycling of the Brexit inventory build last year). The narrative around price/mix headwinds, chiefly less away-from-home business (bag-in-box for fountains usually sell at higher price points than concentrate) and lower single-serve business, was consistent with previous quarters. Management guided to high-single-digit organic sales growth for 2021, roughly in line with our forecast, and we see plenty room for upside depending on the contours of recovery (economic, consumer behavior, and so on) throughout the year.

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