Coca-Cola is a global leader in the beverage industry, with a portfolio spanning carbonated soft drinks, bottled water, energy drinks, dairy, and ready-to-drink coffee and tea. Built on a powerful brand moat, an extensive distribution network, and a proven franchise model, Coca-Cola has maintained its dominance while adapting to shifting consumer preferences. With strategic acquisitions, expansion into emerging markets, and a push toward healthier and functional beverages, the company is positioning itself for sustained long-term growth. The question remains: Should this iconic brand have a place in your portfolio?
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of Coca-Cola. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I do not own any stocks in any of Coca-Cola's direct competitors either. Thus, I have no personal stake in Coca-Cola. If you want to purchase shares or fractional shares of Coca-Cola, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.
The Business
The Coca-Cola Company, founded in 1886 in Georgia, United States, is the world’s largest non-alcoholic beverage company. It operates in more than 200 countries, offering a diverse portfolio that includes sparkling soft drinks, water, sports drinks, coffee, tea, juice, dairy, and plant-based beverages. Every day, approximately 2,2 billion servings of Coca-Cola products are consumed worldwide, highlighting its global presence and market dominance. The company follows an asset-light franchise model, producing and selling concentrates and syrups to a network of independent bottling partners, who handle production, distribution, and merchandising. This structure enhances profitability while enabling rapid global expansion. Coca-Cola’s competitive moat lies in its powerful brand, vast distribution network, economies of scale, and asset-light franchise system. Its brand is one of the most valuable and recognizable in the world, with over 20 beverage brands generating more than $1 billion in annual sales. Strong brand equity ensures its products remain a staple in restaurants, retail stores, and vending machines, giving the company strong negotiating power with suppliers and partners. Its global distribution network, spanning thousands of warehouses, production lines, and cold drink equipment, reaches over 33 million customer outlets. This scale makes it extremely difficult for competitors to match Coca-Cola’s availability and market penetration. The company benefits from economies of scale in procurement, marketing, and logistics, maintaining high margins while keeping costs competitive. Coca-Cola continuously reinvests in advertising, sponsorships, and strategic partnerships to strengthen its market position. The franchise model supports Coca-Cola’s strong financial performance, generating high-margin revenue from concentrates while bottling partners manage capital-intensive operations. This structure makes Coca-Cola highly resilient across economic cycles, allowing it to adjust pricing and product mix to sustain profitability and drive long-term growth.
Management
James Quincey serves as the Chairman and CEO of The Coca-Cola Company. He holds a bachelor's degree in electronic engineering from the University of Liverpool. James Quincey began his career at Bain & Co before joining The Coca-Cola Company in 1996. He has held various leadership roles across different regions, including serving as President of the South Latin division in 2003 and President of the Mexico division from 2005 to 2008, where he led the acquisition of Jugos del Valle. From 2008 to 2012, he was President of the Northwest Europe and Nordics business unit, overseeing the acquisition of Innocent Drinks in 2009. Between 2013 and 2015, as President of the Europe Group, James Quincey expanded Coca-Cola's brand portfolio and improved market share, playing a key role in the creation of Coca-Cola European Partners, one of the world's largest independent Coca-Cola bottlers. In August 2015, James Quincey was appointed President and Chief Operating Officer of The Coca-Cola Company. He became CEO in May 2017, succeeding Muhtar Kent, and was elected Chairman of the Board in April 2019. Under his leadership, Coca-Cola has transformed into a total beverage company, diversifying its portfolio through innovation and strategic acquisitions to meet evolving consumer preferences. James Quincey's leadership style emphasizes inclusion, empowerment, and accountability. He fosters a collaborative environment, encouraging open dialogue and innovative thinking within the organization. He believes in giving his leadership team and employees the autonomy to make decisions, promoting agility and curiosity while holding them accountable for their work. In recognition of his efforts in transforming Coca-Cola, James Quincey was honored with the Yale Legend in Leadership Award in September 2024. I believe Coca-Cola's strategic shift towards becoming a total beverage company, along with its commitment to sustainability, reflects sound leadership under James Quincey. I would feel confident investing in a company led by a CEO like James Quincey.
The Numbers
The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. The numbers are certainly strong, as Coca-Cola has consistently achieved a ROIC above 10% over the past decade, demonstrating its ability to generate solid returns across various economic conditions. Notably, Coca-Cola’s ROIC reached its highest level in the past three years, peaking in 2024. This growth was driven by robust sales, strategic pricing, and efficiency improvements, despite rising costs. The ability to improve ROIC in a challenging macroeconomic environment underscores the resilience of Coca-Cola’s business model and its capacity to sustain long-term profitability. This consistency in high returns on invested capital is a strong indicator that Coca-Cola has the potential to be a long-term compounder, delivering steady value creation for investors over time.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Coca-Cola has experienced periods of equity decline in the past, but from 2018 to 2023, equity grew consistently before seeing a small decline in 2024. The decline in 2024 was due to impairment charges, adverse foreign currency impacts, and other accounting adjustments. I'm not concerned about the equity decline in 2024, especially since equity still reached its second-highest level of the past decade, reinforcing Coca-Cola’s overall financial stability.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Coca-Cola has generated positive free cash flow every year over the past decade. However, it is noteworthy that the company recorded its lowest free cash flow in this period in 2024. The primary reason for this decline was an IRS tax litigation deposit. Excluding this, free cash flow would have been $10,8 billion, representing an increase from the previous year. The tax litigation also impacted the levered free cash flow margin, which would have been 22,9% if not for this one-time expense. Coca-Cola uses a significant portion of its free cash flow to pay dividends, which it has increased for 61 consecutive years. As free cash flow continues to grow, investors should expect higher dividends. The company also repurchases shares, primarily to offset dilution from employee stock option exercises. The free cash flow yield appears low, but excluding the tax litigation, it would have been 4,0% - above the ten-year average. This suggests that while Coca-Cola is not trading at a discount, its valuation is more attractive than usual. However, we will revisit valuation later in the analysis.
Debt
Assessing a company's debt levels is essential when evaluating its financial health. A key factor is whether a company's debt is manageable and can be repaid within three years. We determine this by dividing total long-term debt by earnings. Based on Coca-Cola's financials, its total long-term debt is equivalent to 4,09 years of earnings. While slightly above the preferred threshold, this is not a concern given Coca-Cola's long-standing financial strength. Management has expressed confidence in maintaining current debt levels.
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Risks
Competition presents several risks for The Coca-Cola Company, impacting its pricing power, market share, profitability, and long-term growth potential. Given the highly competitive nature of the commercial beverage industry, Coca-Cola must continuously defend its position against both global giants and emerging microbrands. Coca-Cola operates in a market where competitors, including PepsiCo, Nestlé, Keurig Dr Pepper, and various regional brands, are constantly fighting for shelf space and consumer loyalty. If competitors engage in price wars or aggressive discounting, Coca-Cola may need to follow suit, pressuring margins - especially as input costs like sugar, aluminum, and transportation continue to rise. Private-label store brands, often sold at lower price points, further intensify pricing competition, particularly in cost-sensitive markets. Beyond pricing pressures, Coca-Cola must also invest heavily in advertising, sponsorships, and in-store promotions to maintain brand relevance. Competitors aggressively bid for high-profile sponsorships in sports, entertainment, and retail placements, driving up Coca-Cola’s marketing expenses. If Coca-Cola fails to match or outspend competitors in promotional efforts, it risks losing market share, especially in newer beverage segments where consumer preferences are still forming. The beverage industry is rapidly evolving, with new trends such as functional drinks, plant-based beverages, and premium health-focused products gaining traction. Coca-Cola faces significant competition from brands that specialize in health-conscious drinks, including Nestlé in bottled water, Red Bull in energy drinks, and various startups offering kombucha, wellness beverages, and organic juices. If Coca-Cola fails to innovate and expand into these high-growth categories effectively, it could lose relevance among younger consumers who favor healthier, lower-sugar options.
Health-related concerns, including obesity, sugar consumption, and ingredient safety, present significant risks to Coca-Cola’s business. With increasing public awareness about the health effects of sugary beverages, consumer preferences are shifting towards healthier alternatives such as bottled water, functional drinks, and beverages with natural sweeteners. As more people prioritize wellness, demand for traditional soft drinks, including Coca-Cola’s core carbonated beverages, could decline over time. In response to these concerns, governments worldwide have taken action, posing additional challenges for Coca-Cola. Sugar taxes, implemented in markets like Mexico, the UK, and parts of the U.S., have reduced consumption, particularly among price-sensitive consumers. Beyond taxation, governments and health organizations may impose further restrictions on advertising and marketing, similar to those applied to the tobacco industry. This could limit Coca-Cola’s ability to promote its products effectively, especially to younger demographics. Ingredient concerns present another layer of risk. Regulators in various markets are scrutinizing the use of high-fructose corn syrup, artificial sweeteners, and certain color additives. Some regions have already restricted or banned specific ingredients, pushing beverage companies toward reformulation, which carries risks such as taste alterations that may alienate loyal consumers. The rise of GLP-1 weight-loss drugs introduces a new and uncertain factor. These medications, which are designed to curb appetite and reduce caloric intake, could alter beverage consumption habits. While Coca-Cola has reported no significant impact on sales so far, anecdotal evidence suggests that some consumers using GLP-1 drugs are shifting away from certain food and drink categories. If adoption of these drugs continues to grow, Coca-Cola may need to adjust its product strategy to mitigate potential declines in demand for higher-calorie beverages, particularly in developed markets.
Coca-Cola’s reliance on independent bottling partners presents several risks that could affect its operational efficiency, pricing strategy, and long-term profitability. Because Coca-Cola sells concentrates and syrups rather than finished beverages, it lacks direct control over manufacturing, distribution, and marketing. Since bottling partners are independent companies, some of which are publicly traded, their business priorities and financial decisions may not always align with Coca-Cola’s interests. This reliance on independent bottlers introduces the risk of strategic misalignment. While Coca-Cola focuses on brand innovation, global marketing, and product development, bottlers must handle local production, distribution, and pricing strategies. If bottlers are not satisfied with Coca-Cola’s brand innovation efforts, product mix, or marketing support, they may allocate their resources elsewhere. This could result in slower adoption of new product launches or uneven marketing execution across different regions, limiting Coca-Cola’s ability to drive consistent global growth. The independence of bottling partners also creates the risk of competition within Coca-Cola’s own distribution network. Some bottlers also produce or distribute competing beverage brands, which may divert their focus away from Coca-Cola products. If bottlers find higher-margin opportunities elsewhere, they might dedicate more resources to selling other brands, reducing Coca-Cola’s market penetration in key territories. Coca-Cola’s franchise bottling system has fueled its global expansion and profitability, but it also introduces risks related to operational consistency, pricing flexibility, and strategic alignment. If Coca-Cola fails to maintain strong relationships with its bottlers or if bottlers prioritize competing interests, it could lead to weaker brand execution, reduced market share, and long-term profitability challenges.
Reasons to invest
Coca-Cola’s transformation into a total beverage company is a compelling reason to invest, as it reflects a strategic shift toward long-term, diversified growth. Traditionally known for its core carbonated soft drinks, Coca-Cola has expanded its portfolio to meet evolving consumer preferences and capture growth opportunities across multiple beverage categories. By expanding its portfolio, Coca-Cola reduces its dependence on a single category, making the business more resilient to changing consumer preferences and industry trends. Coca-Cola’s ability to sustain growth across both legacy brands and new product categories is a key strength of this strategy. While sparkling soft drinks remain a strong revenue driver, Coca-Cola has built momentum in areas such as value-added dairy and tea, which are scaling globally while being tailored to local consumer preferences. This flexibility allows the company to capitalize on demand across different markets and demographic segments, further strengthening its position. Coca-Cola’s focus on competing wherever there is strong consumer demand is another reason its total beverage transformation is appealing from an investment perspective. The company is no longer just a soda business - it is actively building brands in high-growth categories such as sparkling water, energy drinks, coffee, dairy, and low/no-sugar alternatives. This diversification allows Coca-Cola to attract health-conscious consumers and align with industry trends favoring functional and lower-calorie beverages. Expanding into alcoholic beverages positions Coca-Cola to tap into a new, adjacent market while leveraging its extensive distribution network for wider reach. The launch of Topo Chico Hard Seltzer in partnership with Molson Coors and the Jack Daniel’s & Coca-Cola ready-to-drink cocktail with Brown-Forman illustrate the company’s ability to leverage its brand strength in new categories.
Coca-Cola’s ability to successfully acquire and scale brands is a strong reason to invest in the company. Its acquisition strategy is not just about buying established billion-dollar brands but also about identifying high-potential smaller brands and leveraging its vast distribution network, marketing expertise, and operational scale to transform them into global leaders. Since 2006, Coca-Cola has added nine billion-dollar brands through acquisitions, but what stands out is that only three of these were billion-dollar brands at the time of purchase. This demonstrates Coca-Cola’s ability to take smaller brands and scale them into major global businesses. A prime example of this is Fairlife. When Coca-Cola first invested in Fairlife in 2014, it was a small brand with just $10 million in retail sales. Today, Fairlife has grown into a nearly $4 billion business, highlighting Coca-Cola’s ability to build brands over time through a combination of product innovation, strategic marketing, and efficient distribution. This compounding effect is central to Coca-Cola’s M&A strategy, enabling small brands to scale into major profit drivers with the right consumer positioning. Coca-Cola’s acquisition strategy is particularly effective because of its global scale and system-wide execution capabilities. Once a brand is acquired, Coca-Cola can use its existing infrastructure, including its distribution network, bottling partners, and retail relationships, to quickly expand availability across multiple markets. Coca-Cola’s ability to integrate acquired brands into its global network gives it a major edge over smaller competitors, which often lack the infrastructure to scale beyond their core markets. Fuze Tea is a strong example of this in the ready-to-drink tea segment. The brand has not only seen rapid growth within its category, but it has also outpaced the industry average, demonstrating how Coca-Cola’s scale can accelerate market penetration. Beyond growing brands, Coca-Cola’s active portfolio management ensures that capital is allocated to the highest-growth opportunities. The company has not only acquired valuable brands like Costa Coffee, BODYARMOR, and Topo Chico but has also divested non-core assets, generating $18 billion in gross proceeds over the past several years. This disciplined strategy ensures Coca-Cola allocates resources to the highest-growth opportunities, reinforcing its long-term investment potential.
Emerging markets present a compelling reason to invest in Coca-Cola, as they offer significant long-term growth potential driven by rising incomes, urbanization, and increasing consumer demand for commercial beverages. With 80% of the world’s population residing in these regions, emerging markets hold tremendous long-term growth potential for Coca-Cola. Currently, consumers in emerging markets rely less on commercial beverages than those in developed regions, but this is changing with rising incomes, urbanization, and shifting consumption patterns. As living standards improve, more consumers transition from homemade or informal beverage consumption to branded, packaged options, creating a massive runway for Coca-Cola’s expansion. Coca-Cola’s market share in emerging markets is currently 7%, just half of what it holds in developed markets. This represents a significant opportunity for growth, as the company can leverage its brand strength, distribution network, and affordability strategies to increase penetration. The expansion of the middle class in regions such as Asia, Africa, and Latin America is particularly important. As these economies grow, demand for packaged beverages - including sparkling soft drinks, bottled water, juice, and ready-to-drink tea and coffee - is expected to rise. Coca-Cola is well-positioned to capitalize on this trend due to its extensive bottling infrastructure, marketing expertise, and ability to tailor products to local tastes and price points. The company’s global franchise model allows it to scale efficiently while adapting to regional preferences. Coca-Cola has adapted to price-sensitive markets by offering smaller, more affordable packaging, making its products accessible to a broader consumer base. With a relatively low market share in emerging markets compared to its position in developed regions, Coca-Cola has a long runway for growth as it continues to expand its presence, capture market share, and benefit from rising consumer demand.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 2,46, which is from the year 2024. I have selected a projected future EPS growth rate of 9%. Finbox expects EPS to grow by 8,6% in the next five years. Additionally, I have selected a projected future P/E ratio of 18, which is double the growth rate. This decision is based on Coca-Cola's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $25,91. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Coca-Cola at a price of $12,96 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 6.805, and capital expenditures were 2.064. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 1.445 in our calculations. The tax provision was 2.437. We have 4.308 outstanding shares. Hence, the calculation will be as follows: (6.805 – 1.445 + 2.437) / 4.308 x 10 = $18,10 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Coca-Cola's free cash flow per share at $1,10 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $13,22. Excluding the IRS tax litigation deposit, free cash flow per share rises to $2,50, increasing the Payback Time price to $30,05.
Conclusion
I believe Coca-Cola is a great company, and it is hard to find a stronger brand moat. I like the management and believe they have made good strategic decisions. Coca-Cola has consistently achieved a ROIC above 10% for the past decade, reaching its highest ROIC in 2024, which is encouraging. While free cash flow declined significantly in 2024 due to a one-time IRS tax litigation deposit, excluding this impact, Coca-Cola would have delivered its highest free cash flow since 2021 and its second-highest in a decade. Competition is a significant risk as Coca-Cola must continuously defend its market position against global beverage giants, private-label brands, and health-conscious startups. Pricing pressures, rising marketing costs, and shifting consumer preferences toward healthier alternatives could erode its market share and profitability. Health-related concerns, including obesity and sugar consumption, also pose a risk as consumer demand shifts toward healthier beverages. Coca-Cola’s reliance on independent bottling partners limits its control over distribution and pricing, creating risks of strategic misalignment and weaker brand execution. If bottlers prioritize competing brands or fail to support Coca-Cola’s growth initiatives, it could hinder market expansion and profitability. Coca-Cola’s transformation into a total beverage company strengthens its investment appeal by diversifying its portfolio beyond carbonated soft drinks and reducing reliance on a single category. By expanding into high-growth segments like energy drinks, dairy, and alcoholic beverages, Coca-Cola is adapting to evolving consumer preferences. Its ability to acquire and scale brands further supports long-term growth, as the company leverages its vast distribution network and marketing expertise to turn small, high-potential brands into global leaders. Emerging markets present a major growth opportunity for Coca-Cola, as rising incomes and urbanization drive demand for commercial beverages. With a lower market share in these regions, Coca-Cola has significant room to expand. At $45 per share, Coca-Cola would trade at a 25% discount to its intrinsic Payback Time price, making it an attractive long-term investment.
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