Does Warren Buffett Favorite Cola-Cola Stock Have the Right Ingredients to Outperform in This Market?

Warren Buffett has long held Coca-Cola (NYSE: KO) stock, first buying it back in 1988. It is currently his company's fourth-largest holding, representing more than 9% of Berkshire Hathaway's stock portfolio at the end of 2024.

It's easy to see why Coca-Cola is a Buffett favorite. The brand is one of the most recognized in the world, giving it a loyal following that few companies can match. As a consumer staple, Coca-Cola products are bought consistently, regardless of the state of the economy, and thanks to its strong brand equity, the company has robust pricing power to keep growing its revenue over time.

That said, the stock had been in a bit of a rut over the past few years until recently. However, its shares are up more than 15% this year in what has been a volatile market.

The soft-drink maker's recent Q1 report and guidance are a good example of why the stock has all the right ingredients to continue to perform well in this market environment.

Pricing power on display

Price once again helped power Coca-Cola's results in the first quarter. While unit case volumes grew 2% year over year and concentrate sales edged up 1%, the company benefited from a 5% increase from price and mix. This led to organic revenue growth -- which excludes the impact of acquisitions, divestitures, and currency movements -- of 6%.

Note that Coca-Cola sells beverage concentrate syrup to its bottling partners, not finished products. As such, concentrate sales impact its revenue, while unit case volumes are an indicator of consumer demand. Concentrate sales can be influenced by supply chain activity and bottlers' planning.

Geographically, prices/mix in North America increased by 8% year over year, with unit volumes down 3%. The company said it was not happy with its declining volumes, noting it faced challenges from severe weather and a calendar shift. It also noted weakening consumer sentiment as the quarter went on, particularly among Hispanic consumers.

Prices/mix in EMEA (Europe, Middle East, and Africa) rose by 6%, with unit volumes up 3%.

Latin America saw price/mix soar 16% year over year, although currency movements wiped out those gains. Unit case volumes in the region were flat. Both Brazil and Argentina were strong, offset by weaker trends in Mexico. The company plans to emphasize the local nature of its operations in Mexico and introduce a "Hecho en Mexico" (Made in Mexico) campaign to improve consumer sentiment.

Asia Pacific saw a price/mix decline of 1%, while unit volumes climbed by 6%. India saw robust volume growth, while China was a positive contributor after it restaged some of its brands.

Overall revenue in the quarter fell by 2% year over year to $11.1 billion, due to currency headwinds and the refranchising of its bottling operations. Adjusted earnings per share (EPS) rose by 6% to $0.73, topping the $0.71 consensus.

Data source: Company filings and press releases. EMEA = Europe, Middle East, and Africa.

Coca-Cola maintained its full-year organic revenue forecast of 5% to 6% growth for the year, despite the economic uncertainty. It also still expects comparable earnings-per-share growth of 2% to 3% for the year.

However, it did slightly lower its forecast for comparable currency-neutral EPS growth to a range of 7% to 9%, down slightly from an earlier estimate of 8% to 10% growth. However, it now sees fewer currency headwinds than its prior forecast.

It considers the current tariff environment manageable due to its local franchise structure, although it's not completely immune. It will see an impact on input costs like orange juice and dispensing equipment.

Image source: Getty Images.

Is the stock a buy?

Coca-Cola uses a pretty simple formula to drive growth: Increase prices and modestly grow global volumes. It has consistently worked over the years, and it should continue to work well into the future.

Meanwhile, the company's marketing prowess and innovation should also not be overlooked. It's leaning into new products, such as Coca-Cola Orange Cream and prebiotic soda Simply Pop, while also leveraging connected packaging to increase consumer engagement.

The stock currently trades at a forward price-to-earnings (P/E) ratio of just above 24, which is in line with where it has traded in recent years.

While it could see some impact from tariffs and any associated economic weakness, overall, it's a defensive name that should continue to see steady, solid growth over time. As such, I think the stock has all the ingredients to continue to perform well in this market.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.