There has been a recipe for Coca-Cola's(NYSE: KO) success in the past couple of years, and it's not the ingredients that go into its soda-making syrup. Instead, it is the company's pricing power. While its stock fell modestly following its Q3 earnings, that pricing power could still be seen in its financial results.
This key edge for Coca-Cola has helped power its stock to a more than 25% gain over the past year. The question for investors, though, is can this continue?
Let's take a closer look at the company's most recent results to help find out.
Strong pricing power
Coca-Cola's pricing power stems from the decades of marketing and brand equity it has built up to become one of the most recognizable brands in the world. The company has seen strong revenue growth over the past couple of years despite relatively modest case volume growth. That trend continued in the third quarter.
For the quarter, Coca-Cola saw its organic revenue climb 9% despite a 1% decline in case volume. This is the same pattern the company has seen earlier this year; however, in the prior quarter, it did see modest case volume growth of 1% in Q1 and 2% in Q2.
The company benefited from a solid 10% increase in price and mix in the quarter, although it said 4% of the increase was driven by markets seeing extreme price inflation. It was able to take price across regions, although outside of North America that was mostly offset by currency changes.
Prices/mix in North America, meanwhile, rose 11%, with the growth coming from an even split of price and mix. It called out strong performances from protein shake and ultra-filtered milk brand Fairlife and sparkling water brand Topo Chico, which help in terms of being a positive mix.
Meanwhile, the company cited weakness in China, Mexico, and Turkey as the reason for its unit volume declines.
Looking ahead, Coca-Cola projected full-year organic revenue growth of 10% and currency-neutral adjusted EPS growth of 14% to 15%. That is up slightly from a prior outlook of 9% to 10% organic revenue growth and 13% to 15% currency-neutral adjusted EPS growth. Overall, it is still looking for adjusted EPS growth of 5% to 6%.
For 2025, the company said it expects pricing from intense inflationary markets to moderate. It also noted that it anticipates higher prices for agricultural commodities.
Image source: Getty Images.
Is Coca-Cola stock a buy?
The key for Coca-Cola, moving forward, is its ability to maintain its pricing power. As long as volume is growing modestly, or even declining slightly, it should be able to continue to nicely raise prices.
This was the first period since the fourth quarter of 2022 where volumes shifted from modest growth to declines. I think the company would trade price for small volume declines, but it can become a slippery slope. Meanwhile, some key markets, such as China and Mexico, saw weakness. Latin America has been a growth driver for Coca-Cola, so this is something to watch, although the company said the weakness in Mexico was largely due to how strong last year's third quarter was.
The company has a nice long-term opportunity with ready-to-drink mixed alcoholic beverages and has been introducing a number of varieties with spirit maker partners. However, the company indicated it could take a decade to determine whether the category is successful at scale. It also thought that it would be spread out among offerings and not have one hit that dominates the market.
Given the defensive nature of its business and brand power, like many other food and beverage stocks, Coca-Cola stock generally trades at a solid valuation multiple. It currently has a forward price-to-earnings (P/E) ratio of about 22, which is consistent with where it has traded in the past few years.
KO PE Ratio (Forward 1y) Chart
Coca-Cola should be a solid stock over the long term, given the pricing power in its business. The risk would be volume declines starting to accelerate. At that point, I would then likely exit the stock, as if volumes declines become too large, it would start to erode its pricing power.
There have certainly been some shifts in taste preferences with younger generations over the years, to which the company will need to continue to adapt. Meanwhile, investors need to continue to monitor how the company is doing in more emerging markets as well. However, there is no indication that volumes will continue to decline, and though Coca-Cola saw volume declines at the end of 2022, they bounced back.
For now, one quarter of slight volume declines is not a trend and not something I'd worry too much about. As such, I think Coca-Cola's pricing power should remain, and investors should feel comfortable continuing to hold this solid stock for the long term.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
