On Thursday, BNP Paribas (OTC:BNPQY) Exane adjusted its outlook on Coca-Cola (NYSE: NYSE:KO), reducing the beverage giant's price target from $78.00 to $76.00, while still maintaining an Outperform rating. The adjustment follows Coca-Cola's third-quarter results, which presented a mixed picture, with a top and bottom line beat but concerns over volume.
Coca-Cola's third-quarter earnings surpassed expectations with organic sales growth (OSG) of 9% compared to the anticipated 6.3%, and earnings per share (EPS) of $0.77 against the forecasted $0.74. Despite these positive figures, the company experienced a modest decline in unit case volume, down by 1% versus the expected 0.5% increase.
The company's performance in developed markets was unusually stronger compared to emerging markets, with North America, Europe, Japan, and Australia outperforming regions like Latin America, India, China, and the Middle East. Coca-Cola signaled volume improvements following a soft July and anticipates continued normalization into fiscal year 2025.
For fiscal year 2024, Coca-Cola raised its OSG outlook to around 10%, up from the previous range of 9-10%, aligning with market expectations. This increase is largely attributed to the pricing benefits from regions experiencing intense inflation. The all-in EPS growth forecast remains at 5-6%, which implies an EPS range of approximately $2.82-2.85, consistent with market estimates.
BNP Paribas Exane cites a more challenging foreign exchange environment as the reason for the lowered EPS estimates and price target for fiscal years 2025-2026. Despite this, the firm continues to recommend Coca-Cola as its top pick in the beverage sector. The valuation of Coca-Cola is based on a probability-weighted outcome of legal scenarios, with a 25 times price-to-earnings ratio for the next twelve months, as the stock currently trades at around 24.5 times. The positive long-term thesis is supported by Coca-Cola's strong portfolio, market share momentum, expected return of capital, and an improving financial profile following bottler refranchising.
In other recent news, Coca-Cola's third-quarter performance exceeded expectations with a 9% growth in organic revenues and a 5% increase in comparable earnings per share (EPS) to $0.77, despite a 1% decline in volume. Jefferies and Morgan Stanley have adjusted their price targets for Coca-Cola to $77.00 and $76.00, respectively, reflecting their positive outlook on the company's robust business and strong pricing power. In addition, Coca-Cola has made a significant $6 billion tax deposit to the IRS related to an ongoing dispute.
Recent developments include a revision to the company's 2024 guidance, expecting about 10% organic revenue growth and 14% to 15% EPS growth. Coca-Cola's Fairlife brand surpassed $1 billion in retail sales, contributing significantly to North American revenue. However, the company expects approximately 6% organic sales growth in Q4, a decrease from the 9% in Q3.
Analysts from Goldman Sachs and JPMorgan have recognized Coca-Cola's strong organic sales growth and inquired about Q4 organic sales growth projections and potential regulatory impacts in Mexico. Despite facing challenges from higher interest expenses and foreign exchange pressures, Coca-Cola is believed to have effective strategies in place to manage these challenges and achieve EPS growth.
InvestingPro Insights
Coca-Cola's financial metrics and market position offer additional context to BNP Paribas Exane's analysis. According to InvestingPro data, Coca-Cola boasts a market capitalization of $288.85 billion, reflecting its status as a beverage industry leader. The company's impressive gross profit margin of 60.43% for the last twelve months ending Q3 2024 underscores its operational efficiency, aligning with the InvestingPro Tip highlighting "impressive gross profit margins."
Investors should note that Coca-Cola has raised its dividend for 54 consecutive years, an InvestingPro Tip that reinforces the company's commitment to shareholder returns. This consistent dividend growth, coupled with a current dividend yield of 2.85%, may appeal to income-focused investors despite the recent price target reduction.
While BNP Paribas Exane maintains an Outperform rating, it's worth considering that the stock is trading at a high EBITDA and revenue valuation multiple, as pointed out by InvestingPro Tips. This could suggest that the market has already priced in much of Coca-Cola's strong performance and future expectations.
For a more comprehensive analysis, InvestingPro offers 11 additional tips for Coca-Cola, providing investors with a deeper understanding of the company's financial health and market position.
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