Coke demand rises in fourth quarter despite higher prices

Coca-Cola reported October-December revenue of $11.8 billion, up 2% but below the FactSet consensus of $12.05 billion, while net income rose 3% to $2.3 billion and adjusted EPS was $0.58, $0.02 ahead of expectations. Global unit case volumes increased 1% (led by the U.S., Japan and Brazil) despite price hikes of ~4% in North America and 1% globally, with Coca-Cola Zero Sugar sales up 13% and mixed category performance across juices/dairy versus water/sports/coffee/tea. Management reiterated confidence with 2026 organic revenue guidance of +4% to +5% and announced a CEO succession (Henrique Braun to assume CEO March 31), while shares fell nearly 4% pre-market on the revenue shortfall.

Analysis

Market structure: Coca‑Cola (KO) is the primary beneficiary — pricing power in North America (4% hike) and premium brands (Smartwater, Topo Chico, Fairlife) are offsetting weakness in juices/dairy and lower‑income demand, producing +1% unit growth. Competitively this supports KO taking share from local carbonated players and private labels that lack premium SKUs, but the 1% global volume implies limited elasticity headroom if prices rise >4–5% cumulatively. Cross‑asset: a defensive KO reduces equity beta in portfolios (expect relative outperformance in risk‑off), IV should compress after the earnings move (short‑term option sell opportunities), USD strength and aluminum/sugar price swings drive reported revenue and margin volatility.

Risk assessment: Tail risks include sugar/soda regulatory taxes in key markets, a misstep in the March 31 CEO transition, or a concentrated supply shock (aluminum/can or bottler disputes) that could knock 2–4% off volumes or margins. Time horizons: immediate (days) — stock reacted ~‑4% premarket and is a potential buyable dip; short term (weeks–months) — watch whether pricing continues to offset promotive elasticity; long term (2026+) — guidance for 4–5% organic revenue growth implies modest secular growth but depends on mix shift sustainability. Hidden dependencies: bottler economics and concentrate pricing cadence, and FX translation; catalysts include CEO handover (Mar 31), next quarterly release, and commodity cost moves over 30–90 days.

Trade implications: Direct play — establish a modest 2–3% long in KO within 48–72 hours to capture a likely mean reversion (target +8–12% over 6–12 months, stop‑loss −8%). Options — implement 3‑month call spreads 5–10% OTM (debit, limited risk) or sell 30–60 day cash‑secured puts ~3–5% below spot to collect premium and accumulate at a lower basis; size each leg ≤1% portfolio. Pair trade — long KO vs short PEP (equal notional) for 3–9 months to isolate beverage premiumization vs snack cyclicality; rotate 1–2% from XLY into XLP/XLP‑like staples exposure.

Contrarian angles: The market punished the revenue miss despite adjusted EPS upside; consensus is underweighting the durability of premium water/zero‑sugar momentum (Coke Zero +13% sales). The selloff may be overdone if commodity costs stay stable — historical KO dips after modest misses have re‑rated 8–15% within 3–6 months when buybacks/dividends supported shares. Unintended consequence risk: over‑premiumization could hollow out base volume and invite regulatory scrutiny or accelerated private‑label encroachment among price‑sensitive cohorts, which would flip the thesis if unit declines exceed 3–4% sequentially.

Key Decisions for Investors

• Consider establishing a 2–3% long position in KO within 48–72 hours on the post‑earnings dip; objective is +8–12% total return over 6–12 months, set a hard stop at −8% and reassess at the March 31 CEO handover.
• Implement options to express a bullish, limited‑risk view: buy 3‑month call spreads ~5–10% OTM (debit) sized at ≤1% portfolio or sell 30–60 day cash‑secured puts ~3–5% below spot to collect premium and potentially accumulate shares at a lower basis.
• Execute a pair trade: go long KO and short PEP on equal notional (size 1–2% net market exposure) for 3–9 months to play beverage premiumization vs snack cyclicality, close or rebalance if the spread moves >6% against the position.
• Rotate 1–2% of portfolio from consumer discretionary (XLY) into consumer staples (XLP) or direct KO exposure; monitor three triggers to adjust positions: (1) CEO transition outcome (Mar 31), (2) commodity moves (aluminum/sugar/PET moves >±5% within 30–90 days), (3) USD moves >±2% vs major currencies — any trigger should prompt a 50–100% rebalance of the position.