Coca-Cola Company (KO.US): Buffett's vision is still sharp, Happy Fatty Water is winning big!

The Coca-Cola Company (KO.US) released its fourth quarter financial report for 2024 (ending December 2024) before the US stock market opened on February 11, 2025, exceeding expectations overall. 1. Volume and price both rose, with strong internal growth: In 4Q24, Coca-Cola Company achieved a revenue of $11.54 billion, a year-on-year increase of 6.4%, exceeding market expectations of 8% (market consensus was $10.67 billion). Organic revenue increased by 14% year-on-year, with volume and price increases of 5% and 9% respectively. Additionally, despite the continued strength of the US dollar in Q4, the company reduced the impact of foreign exchange headwinds to 3% through various hedging measures, showing a slowdown. 2. Emerging markets outperformed mature markets. In terms of regions, while all regions showed strong performance, emerging markets including Colombia, Mexico, Brazil, and the Middle East performed particularly well, driven by rapid economic growth in emerging markets leading to increased local soft drink market space. 3. Healthier categories like tea, coffee, and bottled water performed better: Benefiting from the health trend, tea revenue grew by 5% in Q4 and 4% for the full year, leading in growth rates. Additionally, non-carbonated categories such as coffee and bottled water saw growth of 2%-3% in various regions, while carbonated drink growth was more concentrated in emerging markets. 4. AI helped Coca-Cola achieve cost reduction and efficiency improvement: Production costs decreased due to the widespread promotion of recyclable glass bottles and a drop in core raw material corn syrup prices. The company also raised prices in some regions and introduced smaller packaging to actively increase prices. The combined effect resulted in a record high gross profit margin in the fourth quarter. Despite increased marketing efforts during the holiday season, marketing expenses (advertising, sports event sponsorships) increased. However, the company emphasized the use of AI in daily operations to optimize pricing decisions, increase sales volumes, improve product development success rates and launch speed, and create marketing campaigns. With the assistance of AI, Coca-Cola Company's operating expense ratio remained stable, and the operating profit margin increased from 19% at the beginning of the year to 23.5%. 5. Dividends increased again: Continuing its tradition of the past 62 years, the company increased its dividends, distributing $8.4 billion in dividends for the full year 2024 and repurchasing $1.1 billion in stocks to enhance shareholder returns, with an estimated dividend repurchase yield of around 4%. 6. Performance guidance: The company expects comparable EPS growth of 2%-3% and internal growth of 5%-6% in 2025, slightly lower than expected (expected internal growth of 7.1%). 7. Financial indicators overview Overall Viewpoint: The company's performance in this quarter is solid and exhibits high-speed growth. Compared to PepsiCo, Inc., which has already disclosed its performance, Coca-Cola Company's performance shows more resilience in a high inflation, high interest rate environment. For example, in the North American region, PepsiCo, Inc. beverages saw a sales volume decrease of 3% year-on-year, while Coca-Cola Company saw a 1% increase. The main reason for this is that Coca-Cola Company adjusted its product line timely in response to declining consumer purchasing power and introduced more affordable packaging. For example, in North America, Coca-Cola Company increased the proportion of mini can packaging and introduced more affordable recyclable glass and plastic packaging in Africa. In terms of price, research shows that current North American consumers are significantly more price-sensitive, which means that consumers are more flexible in their brand choices and loyalty to a single brand has decreased. About 40% of consumers have switched retailers and brands in search of lower prices. Despite this environment, Coca-Cola Company was able to achieve nearly 10% growth in prices (half from combating inflation, and half from product structure optimization), highlighting the company's strong brand power and pricing power, as well as consumer loyalty to the Coca-Cola brand. From a valuation perspective, Coca-Cola Company's current P/E ratio is around 27x, which is in line with the average level of the past 10 years and not considered expensive. However, considering the current 10-year US Treasury bond yield of 4.6%, the dividend repurchase yield of around 4% for Coca-Cola Company does not seem particularly attractive. During the process of declining interest rates and bonds, Coca-Cola Company is expected to show better defensive dividend returns, and its investment value will become more prominent. The Dolphin will continue to monitor this. Detailed analysis: I. Investment logic framework According to Coca-Cola Company's disclosure criteria, the company's revenue growth can be broken down into six departments: Europe, Middle East & Africa (EMEA), Latin America, North America, Asia-Pacific, Global Ventures, and Bottling Investments. Each department's revenue growth can be broken down further into internal revenue growth, structural impact (M&A), and foreign exchange impact. 1. Europe, Middle East & Africa (EMEA), Latin America, North America, and Asia-Pacific are divided geographically, with most of their revenue coming from the sale of concentrate to licensed bottlers, with a small portion coming from the sale of finished beverages. 2. Global Ventures is a department established by Coca-Cola Company in 2019, focusing on acquiring potential brands globally to expand its business scope. Currently, the departments revenue includes the brands it has acquired. The business performance of Costa (coffee), innocent (health drinks including plant-based milk, coconut water, NFC fruit juice, etc.) and doadan (tea), as well as the revenue earned from the distribution agreement with Monster.(3) The Bottling Investment Department consists of Coca-Cola Company's bottling business controlled worldwide, with most revenue coming from the manufacturing and sales of finished beverages. Due to being a heavy asset business, this department has relatively lower profitability, so starting in 2015, Coca-Cola Company began gradually divesting this business globally. In the following text, we will focus on Coca-Cola Company's internal revenue growth, breaking it down into volume and price components for analysis: 2. Revenue End: Volume and price rise together, showcasing strong brand power In Q4 2024, Coca-Cola Company achieved apparent revenue of $11.54 billion, a year-on-year increase of 6.4%, exceeding market expectations (market consensus was $10.67 billion). Overall, performance in each region has improved significantly compared to the previous three quarters. Looking at regions, the Latin American region, representing emerging markets, performed the most impressively, with revenue contribution continuously increasing for three consecutive quarters. North America, Asia Pacific, and EMEA saw a slight decrease in contribution. Volume: Looking at the sales volume of concentrate liquids, except for North America, which was slightly below expectations, all other regions exceeded expectations. Based on statements made during the management conference call, it is speculated that Coca-Cola Company timely adjusted its product line in regions with declining purchasing power, introducing more affordable packaging. For example, in China, Coca-Cola Company significantly increased the proportion of mini cans in the second half of the year, with a single mini can priced at only 1.7 RMB, lower than the classic size, making it more acceptable to consumers downgrading their consumption. Additionally, management also emphasized the widespread promotion of recyclable glass bottle packaging in developing countries and emerging markets in Q4, with prices lower than regular packaging, attracting a large number of price-sensitive consumers. Price: From a pricing perspective, thanks to Coca-Cola Company's strong brand power and pricing authority, Coca-Cola Company flexibly raised prices through optimizing product structures and implementing differentiated pricing in different regions and channels, passing the cost pressures on the production end to franchise dealers and consumers, contributing to prices exceeding expectations in all regions. Despite the headwinds from foreign exchange, although the US dollar index continued to rise in Q4, the company used a series of hedging measures to reduce the impact of foreign exchange headwinds to 3%, slowing down compared to the previous period. 3. Optimizing costs + raising product prices, steady growth in gross profit margin On one hand, as mentioned earlier, the widespread promotion of recyclable glass bottle packaging in developing countries and emerging markets by Coca-Cola Company saved the company's production costs. On the other hand, Coca-Cola Company actively raised prices by directly increasing prices in some regions, introducing small bottle packaging, optimizing product combinations, etc., jointly pushing up prices, leading to Coca-Cola Company achieving a new high in gross profit margin in the fourth quarter. 4. "AI + Traditional Manufacturing" achieves cost reduction and efficiency improvement In early 2024, Coca-Cola Company signed an $11 billion cooperation agreement with Microsoft Corporation to improve Coca-Cola Company's overall operational efficiency using generative AI technology, including product development, manufacturing, marketing, supply chain management, and other areas. According to management, AI has already been preliminarily integrated into Coca-Cola Company's daily operations, with more optimization potential in the future. With the support of AI, Coca-Cola Company's operating profit margin has increased from 19% at the beginning of the year to 23.5%. This article is sourced from the "Dolphin Investment Research" WeChat public account, edited by GMTEight: Chen Xiaoyi.