Coca-Cola: Buffett's Vision Shines as the Iconic Drink Thrives!

Coca-Cola (KO) released its Q4 2024 financial report (ending December 2024) before the US stock market opened on February 11, 2025, Beijing time. The overall report exceeded expectations, with key information as follows:

1. Volume and Price Both Rise, Organic Growth Remains Strong: In Q4 2024, Coca-Cola achieved an apparent revenue of $11.54 billion, a year-on-year increase of 6.4%, surpassing market expectations by 8% (market consensus expectation was $10.67 billion). Organic revenue grew by 14% year-on-year, with volume and price growth rates for concentrate sales increasing by 5% and 9% respectively, both exceeding market expectations. Additionally, although the dollar index continued to strengthen in Q4, the company reduced the impact of foreign exchange headwinds to 3 percentage points through a series of hedging measures.

2. Emerging Markets Outperform Mature Markets: By region, while all areas showed significant recovery, overall, emerging markets including Colombia, Mexico, Brazil, and other Latin American regions, as well as the Middle East, performed particularly well, mainly driven by rapid economic growth in emerging markets boosting the local soft drink market.

3. Healthier Categories Such as Tea, Coffee, and Bottled Water Perform Better: By category, benefiting from health trends, tea drinks grew by 5% year-on-year in Q4 and 4% for the whole year, leading the growth rates significantly. Additionally, non-carbonated categories such as coffee and bottled water also achieved 2%-3% growth in various regions, while the growth of carbonated beverages was more concentrated in emerging markets.

4. AI Helps Coca-Cola Reduce Costs and Increase Efficiency: Production costs decreased due to the widespread promotion of recyclable glass bottles and a drop in the price of core raw material corn syrup. On the other hand, Coca-Cola proactively raised prices in some regions through direct price increases and the introduction of smaller bottle sizes. As a result of these two factors, the company's gross margin reached a new high for Q4. On the expense side, although Coca-Cola increased marketing efforts during the Christmas season, leading to higher marketing expenses (advertising spending, sports event sponsorship), the company has repeatedly emphasized the use of AI in daily operations, including optimizing pricing decisions to achieve sales growth, improving the success rate of product development and speed of new launches, and creating marketing advertisements. With the boost from AI, Coca-Cola's period expense ratio remained stable, and operating profit margin increased from 19% at the beginning of the year to 23.5%.

5. Dividend Increased Again: The company continued its tradition of the past 62 years by raising dividends, distributing $8.4 billion in dividends for the entire year of 2024 and repurchasing $1.1 billion in stock to enhance shareholder returns. Dolphin estimates the dividend and repurchase yield to be approximately 4%.6. Performance Guidance: The company expects a comparable EPS growth of 2%-3% in 2025, with organic growth of 5%-6%, slightly below expectations (expected organic growth of 7.1%).

7. Overview of Financial Indicators

Overall View of Dolphin Jun:

Dolphin Jun believes that Coca-Cola's performance this quarter has shown rapid growth on a solid foundation. In terms of volume, compared to PepsiCo, which has already disclosed its performance, Coca-Cola's performance is clearly more resilient in the context of high inflation and high interest rates (for example, in North America, PepsiCo's beverage sales decreased by 3% year-on-year, while Coca-Cola increased by 1% year-on-year).

The main reason is that Coca-Cola timely adjusted its product line in response to the declining purchasing power in the economic environment, launching more affordable packaging. For instance, in North America, Coca-Cola increased the proportion of mini cans, and in Africa, it introduced more affordable recyclable glass and plastic packaging.

In terms of pricing, survey information indicates that current North American consumers' price sensitivity has significantly increased compared to before, which also means that consumers are more flexible in brand choices, with loyalty to a single brand declining. About 40% of consumers have switched retailers and brands in search of lower prices, while Coca-Cola has still managed to achieve nearly 10% growth on the pricing side in this environment (half from combating inflation and half from optimizing product structure), which highlights Coca-Cola's strong brand power and pricing power, as well as consumer loyalty to the Coca-Cola brand.

From a valuation perspective, Coca-Cola is currently at 27x, which is at the average level of the past 10 years and is not considered expensive. However, Dolphin Jun believes that considering the current 10-year U.S. Treasury yield of 4.6%, Coca-Cola's dividend buyback yield of around 4% does not seem to have high attractiveness. Instead, Coca-Cola will demonstrate better defensive attributes in terms of dividend cost-effectiveness during the process of interest rate cuts and declining U.S. Treasury yields, and its investment value will become more prominent, which Dolphin Jun will continue to monitor.

I. Investment Logic Framework

According to Coca-Cola's disclosure, the apparent revenue growth can be broken down into six major departments: Europe, the Middle East & Africa (EMEA), Latin America, North America, Asia Pacific, Global Ventures, and Bottling Investments, with the revenue growth of each department further broken down into organic revenue growth, structural impacts (mergers and acquisitions), and foreign exchange impacts.

(1) Among them, the four departments of Europe, the Middle East & Africa (EMEA), Latin America, North America, and Asia Pacific are categorized by geographic region, with most revenue coming from sales of concentrates to authorized bottlers, and a small portion from sales of finished beverages.

(2) The Global Ventures department was newly established by Coca-Cola in 2019, focusing on acquiring potential brands globally to expand its business scope. Currently, the revenue of this department includes the performance of acquired businesses such as Costa (coffee), innocent (health drinks including plant-based milk, coconut water, NFC juice, etc.), and doğadan (tea), as well as revenue from distribution agreements with the company's Monster.**

(3) The bottling investment department consists of the bottling business controlled by Coca-Cola globally, with most revenue coming from the manufacturing and sales of finished beverages. Since this department is capital-intensive, its profitability is relatively low, leading Coca-Cola to gradually divest from it globally starting in 2015.

We will focus on Coca-Cola's organic revenue growth in the following sections, breaking it down into two driving factors: the sales volume of concentrates and the price mix.

II. Revenue Side: Volume and Price Rise Together, Demonstrating Strong Brand Power

In Q4 2024, Coca-Cola achieved an apparent revenue of $11.54 billion, a year-on-year increase of 6.4%, exceeding market expectations (the market consensus expected $10.67 billion).

Overall, performance across regions showed significant improvement compared to the first three quarters. By region, Latin America, as a representative of emerging markets, performed the best, with its revenue share increasing for three consecutive quarters. North America, Asia-Pacific, and EMEA saw slight declines in their shares.

Volume: In terms of concentrate sales volume, all regions exceeded expectations except for North America, which was slightly below. Based on comments from management during the conference call, Dolphin speculates that this is mainly due to Coca-Cola's timely adjustments to its product line in regions with declining consumer power, introducing more affordable packaging. For example, in China, Coca-Cola significantly increased the proportion of MINI cans in the second half of the year, with a single bottle price of only 1.7 yuan, lower than the classic packaging, which is clearly more acceptable to consumers experiencing "consumption downgrade." Additionally, management emphasized that in Q4, they widely promoted recyclable glass bottle packaging in developing countries and emerging markets, priced lower than regular packaging, attracting a large number of price-sensitive consumers.

Price: In terms of pricing, thanks to Coca-Cola's strong brand power and pricing authority, Coca-Cola flexibly raised prices through optimizing product structure and implementing differentiated pricing across different regions and channels, passing the pressure from production costs onto franchisees and consumers, with price contributions exceeding expectations in all regions

In the face of foreign exchange headwinds, although the US dollar index continued to rise in Q4, the company reduced the impact of foreign exchange headwinds to 3% through a series of hedging measures, which is a slowdown compared to the previous period.

3. Optimizing costs + product price increases, gross profit margin remains stable with an increase

On one hand, as mentioned earlier, Coca-Cola's extensive promotion of recyclable glass bottle packaging in developing countries and emerging markets has saved the company's production costs. On the other hand, Coca-Cola has actively increased prices by directly raising prices in certain regions, launching small bottle packaging, and optimizing product combinations. Together, these efforts have driven Coca-Cola's gross profit margin to a new high in Q4.

4. "AI + traditional manufacturing" achieves cost reduction and efficiency improvement

At the beginning of 2024, Coca-Cola signed an $1.1 billion cooperation agreement with Microsoft, aiming to enhance Coca-Cola's overall operational efficiency through generative AI technology, including product development, manufacturing, marketing, and supply chain management. According to management, AI has already been preliminarily integrated into Coca-Cola's daily operations, and there is still more room for optimization in the future. With AI support, Coca-Cola's operating profit margin has increased from 19% at the beginning of the year to 23.5%.

Dolphin Investment Research [Coca-Cola] past research:

Coca-Cola: Why is the "happy fat house water" the favorite of the "stock god"?

Coca-Cola: Has it already passed its prime? It doesn't hinder "steady happiness" -