Coca-Cola posts a beat and raise; What does it mean for inflation and the rotation trade?

Coca-Cola (KO) reported its second-quarter 2024 earnings, with adjusted earnings per share (EPS) of $0.84, surpassing the consensus estimate of $0.81. Revenues for the quarter rose 3.3% year-over-year to $12.4 billion, exceeding the consensus expectation of $11.78 billion. The strong performance was driven by a 15% growth in organic revenues, including a 9% increase in price/mix and a 6% rise in concentrate sales.

The news around the pricing power is interesting as it raises some questions about inflation. However, the results are certainly a positive for KO. Investors want to see if it is enough to break the stock out above the $65 level. KO trades at 21.5x forward earnings and is not a value story, but it is a factor in the rotation trade. The ability for this to breakout will help provide insight into the rotation trade and whether or not it has legs.

The company's net income attributable to shareholders decreased by 5% to $2.4 billion, or $0.56 per share, compared to the previous year. However, on a comparable basis, EPS grew by 7% to $0.84. Coca-Cola's Q2 results also included a 2% increase in global unit case volume, although volume dipped slightly by 1% in North America, reflecting varied regional demand dynamics.

Coca-Cola provided updated guidance for the third quarter, projecting a 4% currency headwind for comparable net revenues and an 8% headwind for comparable EPS due to current exchange rates and hedged positions. Additionally, acquisitions, divestitures, and structural changes are expected to create further headwinds of 4% to 5% for revenues and 1% to 2% for EPS in Q3.

For the full year 2024, Coca-Cola forecasts organic revenue growth of 9% to 10%, an increase from the prior range of 8% to 9%. The company also raised its outlook for comparable EPS growth to 5% to 6%, up from the previous 4% to 5%. These projections reflect the anticipated pricing impact in markets experiencing intense inflation and the company's robust operating performance.

Despite a decrease in free cash flow to $3.3 billion, down $693 million from the prior year, Coca-Cola expects to generate approximately $9.2 billion in free cash flow for the full year. The company also noted a comparable operating margin of 32.8% for Q2, slightly up from 31.6% in the previous year, indicating improved efficiency.

The positive earnings report and raised outlook have boosted investor confidence, with Coca-Cola shares rising about 1% in premarket trading. This performance comes amidst weaker U.S. consumer demand reported by rival PepsiCo, highlighting Coca-Cola's resilience and effective strategy in navigating market challenges.