Coca-Cola (KO)

Beverage company Coca-Cola (NYSE:KO) met Wall Street’s revenue expectations in Q1 CY2025, but sales were flat year on year at $11.13 billion. Its non-GAAP profit of $0.73 per share was 1.9% above analysts’ consensus estimates.

Company Overview

A pioneer and behemoth in carbonated soft drinks, Coca-Cola (NYSE:KO) is a storied beverage company best known for its flagship soda.

These companies' performance is influenced by brand strength, marketing strategies, and shifts in consumer preferences. Changing consumption patterns are particularly relevant and can be seen in the rise of cannabis, craft beer, and vaping or the steady decline of soda and cigarettes. Companies that spend on innovation to meet consumers where they are with regards to trends can reap huge demand benefits while those who ignore trends can see stagnant volumes. Finally, with the advent of the social media, the cost of starting a brand from scratch is much lower, meaning that new entrants can chip away at the market shares of established players.

Competitors that offer sodas and other beverages include PepsiCo (NASDAQ:PEP), Keurig Dr. Pepper (NASDAQ:KDP), Nestle (SWX:NESN), and Monster Beverage (NASDAQ:MNST).

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $46.8 billion in revenue over the past 12 months, Coca-Cola is one of the most widely recognized consumer staples companies. Its influence over consumers gives it negotiating leverage with distributors, enabling it to pick and choose where it sells its products (a luxury many don’t have). However, its scale is a double-edged sword because it’s harder to find incremental growth when your existing brands have penetrated most of the market. To accelerate sales, Coca-Cola likely needs to optimize its pricing or lean into new products and international expansion.

As you can see below, Coca-Cola’s sales grew at a tepid 5.2% compounded annual growth rate over the last three years, but to its credit, consumers bought more of its products.

This quarter, Coca-Cola’s $11.13 billion of revenue was flat year on year and in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 3.8% over the next 12 months, similar to its three-year rate. This projection doesn't excite us and indicates its products will see some demand headwinds.

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

To analyze whether Coca-Cola generated its growth from changes in price or volume, we can compare its volume growth to its organic revenue growth, which excludes non-fundamental impacts on company financials like mergers and currency fluctuations.

Over the last two years, Coca-Cola’s average quarterly volume growth was a healthy 1.3%. Even with this good performance, we can see that most of the company’s gains have come from price increases by looking at its 11.1% average organic revenue growth. The ability to sell more products while raising prices indicates that Coca-Cola enjoys some degree of inelastic demand.

In Coca-Cola’s Q1 2025, sales volumes jumped 2% year on year. This result was an acceleration from its historical levels, certainly a positive signal.

All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

Coca-Cola has best-in-class unit economics for a consumer staples company, enabling it to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an elite 60.5% gross margin over the last two years. That means for every $100 in revenue, only $39.51 went towards paying for raw materials, production of goods, transportation, and distribution.

This quarter, Coca-Cola’s gross profit margin was 62.6%, in line with the same quarter last year and exceeding analysts’ estimates by 1%. On a wider time horizon, Coca-Cola’s full-year margin has been trending up over the past 12 months, increasing by 1 percentage points. If this move continues, it could suggest better unit economics due to some combination of stable to improving pricing power and input costs (such as raw materials).

Operating margin is a key profitability metric because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.

Coca-Cola has been a well-oiled machine over the last two years. It demonstrated elite profitability for a consumer staples business, boasting an average operating margin of 23.3%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Coca-Cola’s operating margin rose by 2.7 percentage points over the last year, as its sales growth gave it operating leverage.

This quarter, Coca-Cola generated an operating profit margin of 32.9%, up 13.8 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, and administrative overhead.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Coca-Cola’s EPS grew at a decent 6.2% compounded annual growth rate over the last three years, higher than its 5.2% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand.

In Q1, Coca-Cola reported EPS at $0.73, in line with the same quarter last year. This print beat analysts’ estimates by 1.9%. Over the next 12 months, Wall Street expects Coca-Cola’s full-year EPS of $2.89 to grow 4.1%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Coca-Cola has shown robust cash profitability, driven by its attractive business model that enables it to reinvest or return capital to investors. The company’s free cash flow margin averaged 9.8% over the last two years, quite impressive for a consumer staples business.

Taking a step back, we can see that Coca-Cola’s margin dropped by 23.7 percentage points over the last year. If its declines continue, it could signal increasing investment needs and capital intensity.

Coca-Cola burned through $5.51 billion of cash in Q1, equivalent to a negative 49.5% margin. The company’s cash flow turned negative after being positive in the same quarter last year, which isn’t ideal considering its longer-term trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Coca-Cola hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked. Its five-year average ROIC was 15%, higher than most consumer staples businesses.

Coca-Cola reported $13.79 billion of cash and $49.11 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $15.18 billion of EBITDA over the last 12 months, we view Coca-Cola’s 2.3× net-debt-to-EBITDA ratio as safe. We also see its $145 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Coca-Cola beat analysts’ organic revenue expectations this quarter. We were also happy its gross margin narrowly outperformed Wall Street’s estimates. On the other hand, its EBITDA missed. Overall, this was a weaker quarter. The stock traded up 1.5% to $72.85 immediately after reporting.

Updated: July 9, 2025 at 11:00 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Coca-Cola.

There are some positives when it comes to Coca-Cola’s fundamentals. Although its revenue growth was a little slower over the last three years, its admirable gross margins are a wonderful starting point for the overall profitability of the business. And while its cash profitability fell over the last year, its unparalleled brand awareness makes it a household name consumers consistently turn to.

Coca-Cola’s P/E ratio based on the next 12 months is 23.1x. This multiple tells us that a lot of good news is priced in. Add this one to your watchlist and come back to it later.

Wall Street analysts have a consensus one-year price target of $77.83 on the company (compared to the current share price of $69.62).