Rising Regulations And Aging Demographics Will Reduce Soft Drink Demand

Key Takeaways

• Shifting consumer preferences, stricter regulations, and demographic trends threaten core product volumes, raise operational costs, and increase market complexity for Coca-Cola HBC.
  
• Heavy reliance on carbonated beverages and The Coca-Cola Company partnership hampers diversification efforts, risking market share losses and stagnating margins amid industry disruption.
  
• Diversified investments, efficient operations, and sustainability initiatives are fueling resilient growth, enhancing brand strength, and supporting margin improvement despite challenging economic conditions.

Catalysts

Engages in the production, sale, and distribution of non-alcoholic ready-to-drink beverages under franchise in Switzerland, West Coast of Ireland, Central and Eastern Europe, Nigeria, and internationally.

• Increasing consumer health awareness and the rising number of sugar taxes and stricter labeling laws across key markets are likely to accelerate declines in core sparkling soft drink volumes over the next decade, directly pressuring Coca-Cola HBC's revenue base and long-term growth prospects.
  
• The regulatory-driven transition away from single-use plastics is set to drive up capital expenditures and operating expenses, as Coca-Cola HBC faces escalating costs for upgrading packaging lines, implementing deposit return schemes, and ensuring compliance with recycling mandates, which could significantly erode net margins and free cash flow generation.
  
• Structural demographic changes, including aging populations in key European markets and ongoing rural-to-urban migration, are expected to reduce per capita soft drink consumption and create new logistical complexities, increasing distribution costs and limiting the company's ability to sustain prior volume and earnings momentum.
  
• Coca-Cola HBC's reliance on a portfolio heavily weighted toward carbonated soft drinks and its dependence on The Coca-Cola Company for product innovation and bottling agreements may inhibit its ability to diversify fast enough into growing non-traditional beverage categories, leading to market share erosion and margin stagnation as industry disruption accelerates.
  
• Ongoing exposure to currency devaluation, hyperinflation, and political instability in emerging markets-including Africa and select Eastern European countries-is likely to perpetuate earnings volatility and dilute reported profit growth, particularly as these regions become a larger share of total sales.

Coca-Cola HBC Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Coca-Cola HBC compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Coca-Cola HBC's revenue will grow by 6.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.6% today to 8.4% in 3 years time.
• The bearish analysts expect earnings to reach €1.1 billion (and earnings per share of €3.06) by about July 2028, up from €820.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.0x on those 2028 earnings, down from 20.3x today. This future PE is lower than the current PE for the GB Beverage industry at 20.6x.
• Analysts expect the number of shares outstanding to decline by 0.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.0%, as per the Simply Wall St company report.

Coca-Cola HBC Future Earnings Per Share Growth

Risks

• Strategic investments in premium categories such as Energy, Coffee, and Spirits are driving sustained volume and revenue growth across diverse markets, supporting top-line expansion and improving operating margins.
  
• Robust execution of revenue growth management, with targeted pricing, promotions, and packaging innovation, is enabling Coca-Cola HBC to navigate macroeconomic headwinds and maintain positive volume momentum as well as increased revenue per case, underpinning resilience in net margin.
  
• Expansion in underpenetrated and high-potential markets, especially in Africa and developing Europe, is unlocking long-term growth opportunities through portfolio flexing, affordability initiatives, and tailored market strategies, which supports higher earnings over time.
  
• Ongoing operational efficiency gains from automation, supply chain optimization, and digital transformation are lowering production costs and supporting margin expansion, leading to improved net margins and stronger free cash flow.
  
• Leading practices and investment in sustainability, including the rollout of circular packaging solutions and strong performance in environmental rankings, are helping to elevate brand value and customer loyalty, which drives revenue growth and mitigates regulatory risks impacting earnings.

Valuation

• The assumed bearish price target for Coca-Cola HBC is £30.94, which represents two standard deviations below the consensus price target of £40.62. This valuation is based on what can be assumed as the expectations of Coca-Cola HBC's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £45.36, and the most bearish reporting a price target of just £26.37.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €13.0 billion, earnings will come to €1.1 billion, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 6.0%.
• Given the current share price of £39.78, the bearish analyst price target of £30.94 is 28.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.