Coca-Cola looks ‘pretty favorable heading into 2023’: Analyst

Wedbush Analyst Gerald Pascarelli joins Yahoo Finance Live to discuss Coca-Cola earnings, the company's product portfolio, Coke's currency exposure, its Body Armor and Jack and Coke cocktail lines, and consumer resiliency.

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- Coca-Cola trading up after its Q3 earnings beat prompted the company to raise its full year outlook. However, Coca-Cola also warned it expects to keep raising prices with inflation, and says commodities will likely remain volatile. Joining us to break down the latest results is Wedbush Senior Vice President of Equity Research, Gerald Pascarelli. Gerald, good to see you. Your take on this Coca-Cola quarter.

GERALD PASCARELLI: Thanks very much for having me. It was a really good print. You know, like with Pepsi who reported last week, we suspected that the earnings season for the non-alcoholic beverage companies was going to be very favorable. This is something that we continue to see in scanner trends, looking at US retail data in particular for soda and for carbonated soft drinks.

And so I think that these results are a continuation of what this company has been able to deliver for over the first half of the year. And it reflects the trends that we're currently seeing in offtake consumer trends. So the guidance raised was favorable. And I think that from what you're seeing in the share price performance, it's well received by the street.

- The beverage industry has certainly been one that has an acquire to grow annexation around it as well. Is there an area within the Coca-Cola business right now where you believe that there's perhaps, some type of budding new beverage that they need to add on to their portfolio in the near term while valuations are attractive?

GERALD PASCARELLI: I don't know. I think they've done a good job with rounding out their portfolio. And under the current management team, this has been a team that's been very quick to cut underperforming SKUs in a relatively short period of time. I think they're getting really strong performance in their zero sugar offerings. And they're getting really good price pack architecture. So I would say that based on the way things are trending, and based on the amount of pricing that they're getting, that I think that they are looking pretty favorable headed into to 2023 here.

- Yeah, Gerald, you mentioned Coke Zero. Coke Zero in the most recent quarter, up 11%. That number really stood out. But on the topic of prices, how much more room does Coca-Cola have here to raise prices?

GERALD PASCARELLI: It's a combination of rate as well as price pack architecture, right? So you'll put less volume into a bottle of your sell. You'll sell for the same price with lower pack sizes.

Coke does this better than anyone. And so I think when you look at their revenue growth management capabilities, I think when you get into 2023 it'll be a combination of taking the right amount of rate increases, but really looking to leverage their revenue growth management through these price pack architecture initiatives, again, which they're arguably better at doing than anyone. So I think there's room to run here. On the earnings call, it certainly seems like there's the potential for this pricing to at least maybe sustain through the early part of 2023, which would put this company on a good path to deliver on its objectives.

- Do you believe that that pricing strategy is also going to need to be flexible internationally, especially considering the hit in currency that they saw in this most recent quarter?

GERALD PASCARELLI: Sure. So that's a good call out. With 66% of their sales coming from international markets, Coke is more exposed to a strengthening US dollar, and therefore, they will have a larger currency impact to their reported results. I think that if you look at the broad pricing across most of their global markets, it's all up double digits. In Europe, in particular, where there's been some cause for concern just given the outsized inflationary pressure that those consumers are realizing right now, there will be the need for them to continue to take pricing. It'll just be interesting to see how much this outsized pricing has on volumes, and demand elasticities over time. But I think that if you look at the current trends in their developed markets, they're really getting great pricing across the board.

- It seems, Gerald, that Coca-Cola has now found a new stride on product innovation. They have a lot of stuff coming to market over the next six to 12 months. Are there are a couple of products that you view could be a home run?

GERALD PASCARELLI: I think the Jack Daniel's and Coca-Cola RTD cocktail could be something interesting. They're rolling it out in Mexico to start, and then they had mentioned that they're going to come to the US with Jack and Coke in spring of next year. And when you just look at the brand equity of the Coca-Cola trademark, as well as Jack Daniel's, and you look at some of the trends within alcoholic beverages in distilled spirits in particular where prepared cocktails are the fastest growing segment, that could be something meaningful just given the brand equity of both of those products.

- Could not agree more, Gerald. I was just discussing that earlier when we were talking about it at the top of the show. All right. So aside from RTD, there is this entire sports drink category too. And within that sports drink category that has been highly competitive, we've just been keeping an eye on Body Armor within this as well here, you know, where for the growth in that category can Coca-Cola continue to make some of their own headway?

GERALD PASCARELLI: I think when you look at Body Armor right now, they're facing incredibly difficult compares. And that's kind of resulted in a slowdown in their dollar sales, at least that's what we're seeing in scanner data. If you look at the path to more favorable comps, it'll get easier towards the middle of next year to the back half of next year. And so that's just something to take into consideration that Body Armor was a robust growth story, they were making really strong rates of market share capture when Coke acquired the company outright. And so I think they're just going through some very heavy, some increasingly difficult compares, which will need to be cycled and probably turn to a benefit towards the back half of the year.

- Within your coverage universe, are there other companies that resemble what Coca-Cola is doing now, that they're now starting to innovate more, they're having success pushing through price increases, and there's just a sense of stability to the business?

GERALD PASCARELLI: I think within non-alcoholic beverages in particular, we saw it with Pepsi last week. And when you look at the scanner data, we're seeing it with Keurig Dr. Pepper who will report earnings on Thursday. There are similarities in so far as the consumer is still showing the ability to pay up for these brands that have shrunk equity. And so that's where the similarity is.

When you look at the makeup of revenue growth for all three of these traditional nonalcoholic companies, they're all price led. It's really helping to offset this outsized level of commodity inflation that we're seeing. And so I think the narrative is going to continue to hold constant. As long one company is able to get price and drive mix, I think it's going to be a rising tide lifts all boats scenario at least over the near term.

- Wedbush Senior Vice President of Equity Research, Gerald Pascarelli. Thanks so much for joining us to break down Coca-Cola this morning.

GERALD PASCARELLI: Thanks for having me.