the coca-cola company soft drinks - credit suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

15 September 2016Americas/United States

Equity ResearchSoft Drinks

The Coca-Cola Company (KO)

INITIATION Rating NEUTRALPrice (14-Sep-16,US$) 42.11Target price (US$) 44.0052-week price range 46.89 - 38.76Market cap (US$ m) 181,748Enterprise value (US$ m) 219,534*Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector.¹Target price is for 12 months.

Laurent Grandet212 538 7901

[email protected]

Clay Crumbliss, CFA212 538 1076

[email protected]

Back to the Future; Initiating at NeutralWe are initiating coverage of The Coca-Cola Company with a Neutral rating and $44 target price. We think the shares will remain range-bound over the coming 12 months as the company implements the organizational and operational changes it is currently undertaking. Coke is one of the top three most valuable brands in the world and one of the best operators out there. Our estimates are generally in-line with the consensus for FY16/17, but we think earnings over the coming year or two will be bumpy owing to the timing of refranchising.■ Key Strengths Set Coke Apart: The company's global footprint and scale

along with a best-in-class operational execution across the Coke bottling system are clear competitive advantages. In addition, Coke's dominance in the on-premise channel will continue to provide an advantage in building brand preference and consumer experience.

■ Catalysts for Revitalization Already Factored In: Positives for Coke include (1) the refranchising, (2) a better alignment with bottling partners, and (3) the Monster deal. We think the company is making the right moves and will do better what it does best. However, we question whether it’s enough to move the needle over the coming couple years when KO's core Carbonated Soft Drink (CSD) business is declining in the U.S (-2%) and slowing down internationally (+2%).

■ Lack of Reinvention: Despite some local investments in value-added dairy, it seems to us that Coke is still shy of defining its new frontier. The challenge now may be to invest in businesses that will be dilutive to the highly profitable concentrate model with margins approaching 34% following refranchising.

■ Valuation: We apply a 23x multiple to our discounted CY18 EPS estimate, supported by our SOTP. This represents a premium to PEP and DPS, which we think is justified by the relative international strength, global CSD leadership, and the new asset-light model. EPS will remain flat through FY18 as a 30% lower sales base is offset by structurally higher margins.

Quarterly EPS Q1 Q2 Q3 Q42015A 0.48 0.63 0.51 0.382016E 0.45 0.60 0.48 0.382017E 0.48 0.55 0.55 0.39

Financial and valuation metricsYear 12/15A 12/16E 12/17E 12/18EEPS (CS adj.) (US$) 2.00 1.91 1.97 1.97Prev. EPS (US$) - - - -P/E (x) 21.1 22.1 21.4 21.4Revenue (US$ m) 44,257.0 41,437.8 35,546.5 29,820.0EBITDA (US$ m) 12,343 11,914 11,813 11,219EV/EBITDA (current) 17.8 18.5 18.6 19.6FCF yield (%) 4.3 4.1 4.3 4.2Net debt (US$ m) 36,807 37,786 37,845 36,949ROIC (%) 13 12 13 13

Number of shares (m) 4,316 IC (current, US$ m) 62,571EV/IC (x) 3.4 Net debt (Next Qtr., US$ m) 37,809.4Dividend (current, US$) 1.40 Net debt/EBITDA (12/15A) 3.2Dividend yield (%) 3.32BV/share (Next Qtr., US$) 6.1Source: Company data, Thomson Reuters, Credit Suisse estimates

15 September 2016

The Coca-Cola Company (KO) 2

The Coca-Cola Company (KO)Price (14 Sep 2016): US$42.11; Rating: NEUTRAL; Target Price: US$44.00; Analyst: Laurent GrandetIncome Statement 12/15A 12/16E 12/17E 12/18ERevenue (US$ m) 44,257.0 41,437.8 35,546.5 29,820.0EBITDA 12,343 11,914 11,813 11,219Depr. & amort. (1,970) (1,970) (1,500) (1,000)EBIT (US$) 10,373 9,944 10,313 10,219Net interest exp 77 (139) (311) (300)Associates 576 918 1,000 1,070Other adj. 344 58 0 0PBT (US$) 11,370 10,780 11,002 10,989Income taxes (2,558) (2,426) (2,476) (2,473)Profit after tax 8,812 8,355 8,527 8,517Minorities (15) (22) -0 -0Preferred dividends - - - -Associates & other 0 0 0 0Net profit (US$) 8,797 8,333 8,527 8,517Other NPAT adjustments (1,446) 0 0 0Reported net income 7,351 8,333 8,527 8,517Cash Flow 12/15A 12/16E 12/17E 12/18EEBIT 10,373 9,944 10,313 10,219Net interest 77 (139) (311) (300)Cash taxes paid - - - -Change in working capital (157) (788) (929) (889)Other cash & non-cash items 235 122 275 (145)Cash flow from operations 10,528 9,139 9,348 8,886CAPEX (2,553) (1,658) (1,422) (1,193)Free cashflow to the firm 7,975 7,482 7,926 7,693Aquisitions (2,491) (723) 0 0Divestments 85 41 0 0Other investment/(outflows) (1,227) 830 0 0Cash flow from investments (6,186) (1,510) (1,422) (1,193)Net share issue(/repurchase) (2,319) (2,128) (1,555) 0Dividends paid (5,741) (6,068) (6,430) (6,797)Issuance (retirement) of debt 2,696 3,197 0 0Other (2,998) (3,609) (0) 0Cashflow from financing activities (8,362) (8,608) (7,985) (6,797)Effect of exchange rates - - - -Changes in Net Cash/Debt (4,020) (979) (59) 896Net debt at start 32,787 36,807 37,786 37,845Change in net debt 4,020 979 59 (896)Net debt at end 36,807 37,786 37,845 36,949Balance Sheet (US$) 12/15A 12/16E 12/17E 12/18EAssetsCash & cash equivalents 7,309 10,262 10,203 11,099Account receivables 3,941 2,965 2,959 2,463Inventory 2,902 2,504 2,549 1,722Other current assets 19,243 20,851 20,115 19,199Total current assets 33,395 36,582 35,827 34,483Total fixed assets 12,571 12,186 10,356 6,493Intangible assets and goodwill 24,132 23,472 23,524 23,579Investment securities - - - -Other assets 19,898 21,869 21,869 21,869Total assets 89,996 94,109 91,576 86,424LiabilitiesAccounts payables 9,660 9,798 8,379 5,451Short-term debt 15,805 18,796 18,796 18,796Other short term liabilities 1,464 1,450 1,244 1,044Total current liabilities 26,929 30,044 28,419 25,291Long-term debt 28,311 29,252 29,252 29,252Other liabilities 8,992 8,460 8,460 8,460Total liabilities 64,232 67,756 66,131 63,003Shareholder equity 25,554 26,152 25,243 23,221Minority interests 210 201 201 201Total liabilities and equity 89,996 94,109 91,576 86,424Net debt 36,807 37,786 37,845 36,949

Per share 12/15A 12/16E 12/17E 12/18ENo. of shares (wtd avg) 4,405 4,369 4,333 4,321CS adj. EPS 2.00 1.91 1.97 1.97Prev. EPS (US$)Dividend (US$) 1.32 1.40 1.48 1.57Dividend payout ratio 66.09 73.41 75.41 79.81Free cash flow per share 1.81 1.71 1.83 1.78Earnings 12/15A 12/16E 12/17E 12/18ESales growth (%) (3.8) (6.4) (14.2) (16.1)EBIT growth (%) (5.3) (4.1) 3.7 (0.9)Net profit growth (%) (3.2) (5.3) 2.3 (0.1)EPS growth (%) (2.2) (4.5) 3.2 0.2EBITDA margin (%) 27.9 28.8 33.2 37.6EBIT margin (%) 23.4 24.0 29.0 34.3Pretax margin (%) 25.7 26.0 31.0 36.9Net margin (%) 19.9 20.1 24.0 28.6Valuation 12/15A 12/16E 12/17E 12/18EEV/Sales (x) 4.94 5.30 6.18 7.33EV/EBITDA (x) 17.8 18.5 18.6 19.6EV/EBIT (x) 21.1 22.1 21.3 21.4P/E (x) 21.1 22.1 21.4 21.4Price to book (x) 7.3 7.0 7.2 7.8Asset turnover 0.5 0.4 0.4 0.3Returns 12/15A 12/16E 12/17E 12/18EROE stated-return on (%) 26.3 32.2 33.2 35.1ROIC (%) 0.1 0.1 0.1 0.1Interest burden (%) 1.10 1.08 1.07 1.08Tax rate (%) 22.5 22.5 22.5 22.5Financial leverage (%) 1.73 1.84 1.90 2.07Gearing 12/15A 12/16E 12/17E 12/18ENet debt/equity (%) 142.9 143.4 148.7 157.8Net Debt to EBITDA (x) 3.0 3.2 3.2 3.3Interest coverage ratio (X) (134.7) 71.3 33.2 34.1Quarterly EPS Q1 Q2 Q3 Q42015A 0.48 0.63 0.51 0.382016E 0.45 0.60 0.48 0.382017E 0.48 0.55 0.55 0.39

Share price performance

KO .N S& P 5 0 0 IN D EX

O ct - 1 5 Jan - 1 6 A p r - 1 6 Ju l - 1 63 5

4 0

4 5

5 0

On 14-Sep-2016 the S&P 500 INDEX closed at 2125.77Daily Sep16, 2015 - Sep14, 2016, 09/16/15 = US$39.15

Source: Company data, Thomson Reuters, Credit Suisse estimates

15 September 2016


Key ChartsFigure 1: Coca-Cola Company SWOT

Strengths Weaknesses

•

••

Number one beverage brand in the world, by a long shotCoke bottling and distribution networkOn-premise is a key enabler

•

••

Core business in CSD in constant decline in the US since 2004No leading global NCB brands in the portfolioLack of reinvention and new talent

Opportunities Threats

•

•

•

Leverage new asset-light structure to invent and test new spacesUse FCF generation to acquire a substantial NCB businessCould use Monster as a catalyst to revitalize CSD

•

••

Impact of sugar tax and further medical research supporting the link between excess sugar consumption, diabetes and obesity Disruption linked to refranchisingMillennials turn their backs on big "manufactured" brands

Source: Credit Suisse.

Figure 2: Coke Is the Undisputed Global CSD Market Leader with a Commanding 54% Share

Figure 3: On-Premise and Its Strategic Relationship with Global Players Is Key

54%39%

66%

22%34%

14%

0%

20%

40%

60%

80%

100%

Global USA International

Ret

ail V

alue

Sha

re (%

)

Coke CSD Retail Market Share

Coca-Cola PepsiCo

Source: Nielsen xAOC+C, Nielsen International, Credit Suisse estimates. Source: Company website.

Figure 4: Coke's Portfolio Is Highly Skewed to CSDFigure 5: CSD Volumes Have Been Consistently Declining Since 2004 in the U.S.

CSD77%

NCB23%

Coke Estimated Global Portfolio Split

(3%)

(2%)(2%) (2%)

(4%)

(3%)

(2%)

(1%)

0%

2013 2014 2015 LTMRet

ail V

olum

e G

row

th (%

)

US CSD Category Retail Volume Growth

CSD Volume

Source: Company data, Credit Suisse. Source: Nielsen xAOC+C, Nielsen International, Credit Suisse estimates.

15 September 2016


Initiating at Neutral; $44We are initiating coverage of The Coca-Cola Company or "Coca-Cola" or "Coke" (KO) with a Neutral rating. Our $44 target price implies a nominal 5% upside to the shares. Our valuation assumes a 23x P/E on our discounted CY18 EPS estimate. This is a premium to both PEP and DPS.

Figure 6: Our 23x P/E Represents a Premium to the Level at Which We Are Pricing PEP and DPS Shares

23.0x

17.8x

22.0x

14.6x

21.0x

12.9x

5x

10x

15x

20x

25x

30x

PE EV / EBITDA

Val

uatio

n M

ultip

le (x

)Credit Suisse Valuation Framework - US NAB

KO PEP DPS

Source: Credit Suisse estimates.The multiples shown reflect where the US Beverages Equity Research team values each stock (not necessarily where each is trading).

Our EstimatesWe are introducing our 2016-18 EPS estimates of $1.91, $1.97, and $1.97, respectively. This takes into account our estimation of how the refranchising will play out over the coming years as the sales base declines (loss of bottling operations) and margins expand.

Upside/Downside ScenarioOur upside and downside cases assume the following:

■ Blue Sky: Upside to the base case driven by stronger than expected CSD performance in North America.

■ Grey Sky: Refranchising becomes a distraction and sales growth slows in FY17/18.

15 September 2016


Figure 7: Our Downside and Upside Scenarios Range from $38 to $51 per Share, Respectively

Scenarios CS FY18E Value

($ per share) EPS ($) PE (x) Eq V ($) 1 Comments

Bull Case $2.17 24.0x $51 10% upside to base EPS for better CSD performance in NA; multiple expands

Base Case $1.97 23.0x $44 Base case

Bear Case $1.77 22.0x $38 Sales growth slows due to distraction from refranchising; multiple contracts

1. Discounted back 0.3 years from FY18 to represent the expected stock price using a NTM multiple, one-year from today

Source: Company data, Credit Suisse estimates.Note: Uses discounted calendar year earnings estimates that may not match estimates shown elsewhere in the document.

15 September 2016


Investment Thesis■ Playing to Its Strengths

■ Global Growth Becoming More Elusive

■ Two Major Catalysts Both Already Priced In

■ Lack of Reinvention Could Hold Coke Back

Playing to Its StrengthsGlobal Leader in Carbonated Soft Drinks (CSD)Coke is the global leader in CSD with an estimated 54% combined market share in the countries that we track, representing around 74% of the total global retail value. Where the share differential with its closest competitor is about 5 percentage points in the United States, that gap widens to an astonishing 52 percentage points internationally. In the international geographies that we are tracking, Coke has an approximately 66% CSD market share.

Figure 8: Coke Is the Global CSD (Ex. Energy) Market Leader with an Approximate 32-Point Margin Over Its Closest Competitor, PepsiCo

39%

68%77%

59%

47%

66% 60%

34%

4%12% 12%

19%27%

31%

0%

20%

40%

60%

80%

100%

USA Brazil Mexico Europe Russia China India

Ret

ail V

alue

Sha

re (%

)

Global CSD Market Share (ex Energy)

Coca-Cola PepsiCo Coke Global PepsiCo Global

Source: Nielsen xAOC+C and Nielsen International, excluding energy.Note: The global shares are proxies using the weighted shares of the countries that we track, as shown in the chart.

To build its leadership, Coke is capitalizing on three key competitive advantages:

■ Strength of its bottling network

■ Undisputable leadership in the on-premise channel

■ Omnipresence of Coke branding

Strong Global Bottling Network The power of the global Coke system including the bottling operations and the direct store delivery (DSD) network are one of the company's largest advantages over competition. Coke's bottlers have scale and financial solidity, have better alignment through equity investments, and are among the best at executing plans.

15 September 2016


Coke's strategy outside of the United States has been to consolidate the operating business with anchor bottlers that have the financial capabilities to compete and optimize the distribution of its products. These bottlers tend to operate across a number of countries, servicing large geographic areas with coordination and excellence. Furthermore, to strengthen those relationships, Coke owns equity in its key anchor bottlers, which helps create strategic and financial alignments. This compares favorably with PepsiCo that has hundreds of local bottlers all around the world, which could make coordination and alignment very complex.

This differs from the model in North America where Coke's bottling system will be more fragmented and may only service a few states and where its closest competitor is mainly operating as an integrated operator.

Figure 9: Around Two-Thirds of the Coke Business Is in the Hands of Few Anchor Bottlers

Figure 10: Coke's Stake in Anchor Bottlers and Monster Represents ~$900M of Its Equity Income

Bottler 2015

Coca-Cola FEMSA 17%Coca-Cola European Partners 11%Coca-Cola HBC 8%ArcaContal 7%Coca-Cola Icecek 5%Swire (ex US) 4%Coca-Cola Beverages Africa 4%Andina 3%Coca-Cola Amatil 3%Coca-Cola Japan (East & West) 2%Castel 2%Others 35%

Equity partner Stake Share of Profit

CCEP 18% 215FEMSA 28% 197Monster 17% 152Coca-Cola HBC 24% 106Coca-Cola Amatil 29% 91Arca Continental 9% 51Coca-Cola Icecek 20% 32Andina 15% 27

Source: Company data, Credit Suisse. Source: Company data, Thomson Reuters, Credit Suisse.

Coke has demonstrated the strength of its bottling system in a number of ways over the past few years. One way was its ability to expand Coke Zero distribution across the world in two short years. More recently, Coca-Cola European Partners (CCEP) was able to leverage its resources and structure to increase retail-weighted distribution like no other company in the beverage business could have achieved. It was able to reach 80% distribution of Coke Life in just three periods and 60% for Smartwater in four periods despite water not being the core of its business. This speed and effectiveness are almost unheard of in the food and beverage retail world.

15 September 2016


Figure 11: Coke Life Achieved 80% Distribution in Two Months in the UK with the Help of CCEP

Figure 12: Smartwater Achieved 60% Distribution in Four Months in a New Category

0%

20%

40%

60%

80%

100%

4WKS TO19.07.14

4WKS TO06.12.14

4WKS TO25.04.15

Ret

ail A

CV

(%)

Distribution of Coke Life in the UK

0%

20%

40%

60%

80%

100%

4WKS TO16.08.14

4WKS TO03.01.15

4WKS TO23.05.15

Ret

ail A

CV

(%)

Distribution of Smartwater in the UK

Source: Nielsen International, Credit Suisse. Source: Nielsen International, Credit Suisse.

On-Premise Stronghold Is an Unmatched Competitive AdvantageOn-premise is a strategic channel for Coke in terms of size of the business but also as a way to build brand awareness, trial, and ultimately preference.

On-premise represents about 50% of the consumer's dollar spent in the United States and around 35% outside of North America. For Coke, it represents one-third of its U.S. volume, and what we believe makes it even more important is that it's a piece of the business that is not refranchised in the United States. As a consequence and because of the significant difference in the economics with the concentrate model of the refranchised packaged goods business, it will be a critical piece to understand and follow to assess all elements of KO U.S. business algorithm. This doesn't apply to Coke international segments, as on-premise is or will be fully managed by Coke bottlers there.

Figure 13: Consumers Are Spending as Much Money on Nonalcoholic Beverages in On-Premise as They Are in Retail

020406080

100120140160180200

1935

1938

1941

1944

1947

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

Rev

enue

($B

B)

Beverage Revenue Split between Retail and On-Premise

On-premise Retail

Source: USDA, Credit Suisse.

15 September 2016


Given the structurally lower margin profile of the on-premise and the fact that it's all being refranchised internationally, we wondered why Coke would choose to retain it in the United States. Management told us it was for historic and cultural reasons (Coke was originally launched in fountain, so this business holds significant value as where Coca-Cola got its start) and also because the U.S. bottlers don't actually have the capabilities to manage that business.

We believe there could be more reasons, such as (1) Coke wants to keep the on-premise business as a strategic marketing play, and/or (2) the low profitability made it less appealing to the bottlers.

On-premise is definitely a marketing tool that Coke has been able to exploit to its advantage. When launching Coke Zero globally, Coke used McDonalds as the vehicle (with its high traffic and 36,000 stores across the world) to quickly gain trial right at the point of consumption. Coke has been leveraging the channel to habituate consumers to drink Coke with a burger or a pizza, and then, by extension, with a meal. The meal occasion is critical to build penetration and per capita consumption, as it adds to base refreshment occasion and is by far the largest beverage consumption occasion. Replacing tap water has been one of the major levers to develop core sales.

Figure 14: McDonald's Big Mac and Coca-Cola Association

Source: McDonald's website.

Coke is the undisputable global leader in on-premise with an estimated global share of approximately 80%. As we show in Figure 15, Coke services eight of the top ten on-premise accounts and has pouring exclusively rights with six of them. This provides Coke with a significant market share advantage over its competition and a recurring revenue stream. Switching from one manufacturer to the other is a very rare occurrence, and beverages suppliers usually seem to have long-term contracts with those accounts.

15 September 2016


Figure 15: Coke Services Eight of the Top Ten Largest (in Number of Stores) U.S. On-Premise Accounts

Account Cola Lemon Lime

Subway Coke ← Sprite ←

McDonalds Coke ← Sprite ←

Pizza Hut Pepsi Sierra Mist

7-Eleven Coke / Pepsi ← Sprite / Sierra Mist / 7Up ←

Dunkin' Donuts Coke ← Sprite ←

Burger King Coke ← Sprite ←

Taco Bell Pepsi Sierra Mist

Wendy's Coke ← Sprite ←

Domino's Pizza Coke ← Sprite ←

Dairy Queen Coke / Pepsi ← Sprite / Sierra Mist / 7Up ←

Source: Company data, Credit Suisse estimates.

Coke has been benefiting from McDonald's global expansion (and vice versa) for decades, not only facing new consumers in new countries but also building the foundation and scale of an on-premise business to reach smaller, more lucrative local customers.

Coke has similarly done an excellent job of establishing its brands in key recreational locations such as Disney parks, stadiums, arenas, and cinemas. Not only is it a way to sell its portfolio to a captive audience, but it's also a great opportunity to create a positive association between a Coke drinking experience and a pleasant moment or event for the consumer. That positive connection helped forge the likability of Coke over its competitor that is then translated into additional retail sales.

Now even more than before, on-premise locations will be places where consumers and Millennials will be able to experiment with new flavors, test new textures and packaging, or be able to craft in situ the concoction they like. We have seen that development in the beer business with craft beers, now representing ~30% of the U.S. beer business. The craft movement has been developed from on-premise locations. In general, on-premise is the channel to start when launching a new beverage brand (not retail). From Red Bull, Coke, craft beer, and Grey Goose vodka, examples abound to demonstrate that the value of the on-premise channel is more than just transactional. Coke should benefit from its leading market share to engage in a new consumer relationship and design/co-create the drinks of the 21st century.

Coke continues to invest heavily in the on-premise channel and not only to gain new customers. It has been innovating with the launch of its Freestyle machine offering consumers total control and choice with more than 100 flavor options in a single machine. Management told us Freestyle has increased the beverage incidence wherever it has been placed and increased the consumer experience at the point of purchase. Coke has now installed 70,000 Freestyle machines in the United States and a few thousand internationally according to management.

Aside from the commercial and consumer benefits Freestyle provides, we see some other benefits to it. What is inside is almost more interesting than what is outside. One of key differentiators comes from its ultra-concentrated 46oz cartridges that deliver as much finished product as the legacy 5 gallon bag-in-box (BIB). This eliminates the need to transport water from one place to another (i.e., more sustainable), but we can also imagine this technology being also applicable to other part of the business. If 46oz translates into 120L of finished products, then 0.13oz yields a 12oz serving. This micro-dosing technology could very much be leveraged for an in-home or office appliances to replace the failed Keurig Kold experience.

15 September 2016


Moreover, there is potentially an additional benefit to Freestyle, in our view. We believe it does add extra loyalty to Coke customers that would be reluctant to go back to the legacy BIB platform its competitor offers. One thing we were not able to factor into our model is the additional profitability the Freestyle machine is offering. Coke management has resisted discussing the economics of the platform, but we can't imagine Coke having invested what has been speculated to be $1B+ for it to be dilutive.

Figure 16: Freestyle Technology Revolutionizes Fountain Dispensing and Could Serve as a Platform for Expansion into Adjacent Ways of Reaching Consumers

Source: Company website.

Omnipresence of Coke Branding Who has gone a day without being exposed to a Coca-Cola product, signage, vending machine, poster, or advertisement? It's unlikely that many people could make that claim, especially in an Olympic year.

Coke for decades, and not only with its on-premise platform as seen before, has spent a significant amount of money building its brands and primarily its flagship one. The company spends $4B, or 9% of its sales, promoting its brands. We figure this is about four times what PepsiCo is spending on beverages (~$1.1B). PepsiCo spends 4% of its net sales on advertising, including money that is allocated to the global Frito-Lay and Quaker businesses. We assume those businesses are receiving at least their fair share of the budget, or around 50% or more.

15 September 2016


Figure 17: Coke's Ad Spending as a Percent of Sales Has Expanded over PepsiCo by a 160-BPS Margin over a Three-Year Period

7.0%7.6%

9.0% 9.0%

3.6% 3.4% 3.8% 4.0%

0%

2%

4%

6%

8%

10%

2013 2014 2015 2016E

Exp

ense

as

% o

f Net

Sal

es

Advertising Benchmark

Coca-Cola PepsiCo


After more than a century of cumulated investments, Coca-Cola ranked number one among the top food and beverage brands with an estimated value of $78.4B, number three in the overall ranking of Interbrand's Top 100 brands, according to the 2015 ranking.

Figure 18: Interbrand Ranked Coca-Cola as the Most Valuable Food and Beverage Brand in the World

$78B#1 Global Food & Beverage

#3 Global Brand Overall

Source: Interbrand, Credit Suisse.

Global Growth Becoming More Elusive International Volume Growth Slowing Down Is Not Compensating for U.S. SoftnessFor the past few years, total company volume growth has been driven primarily by the international business. Since 2013, international volumes have come down, bringing with it the total company volume growth.

15 September 2016


As beverage volumes tend to be tied to GDP growth, Coke being the global leader and not having gaining shares substantially, its volume tends to decline in relative tandem, which we show in Figure 19.

Figure 19: Global Volumes Are Growing but at a Limited Pace

1.2%

1.9% 1.8%

1.1%

0%

1%

2%

1%

3% 2%

2%

1%

0%

1%

2%

3%

FY13 A FY14 A FY15 A FY16 E

Rep

orte

d V

olum

e G

row

th (%

)

Consolidated Reported Volume Growth

Total Volume Growth North America International World GDP Growth

Source: Company data, Credit Suisse estimates.Note: Reflects the sales weighted reported volume of the operating segments, excluding BIG, Corporate, and EliminationsWorld GDP growth from the World Bank does not represent the actual growth; the line is only directional to demonstrate the correlation.

Not Benefiting from Noncarbonated Beverage Growth in the United States nor from the Size of the NCB Category Internationally We expect that global volume growth will continue to be elusive over the coming 12 months. The Coke business is heavily skewed toward the declining CSD category and more specifically around the cola category, which is the most affected subcategory within CSD. Coke is not benefiting from the growth of noncarbonated beverages in the same way that PepsiCo is.

This highlights that one of the issues with Coke, which we think will limit growth into the foreseeable future, is its exposure to CSD or more its underexposure to NCB. In fact, according to our estimates (which we admit are not based on perfect information but believe are at least directionally correct), Coke has more than 75% of its global sales in CSD compared with the overall beverage market at less than one-half.

15 September 2016


Figure 20: Coke Is Over Indexing to CSD Compared with the Global Market

Figure 21: We Estimate Global CSD Is Growing ~1% and NCB ~5%

CSD77%

NCB23%

Coke Est Portfolio Split

CSD44%

NCB56%

Global Bev Est Portfolio Split

Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.

In the following analysis, we attempt to demonstrate the source of Coke's sales global growth. We have based our analysis on LTM Nielsen data, which were built up using the geographies we are able to track. We estimate these countries (the United States, Mexico, Brazil, Europe including the United Kingdom, Russia, China, and India) represent around 75% of global sales. While we recognize that it's not the complete picture, we think it's at least representative and should help provide investors with a framework to see the bigger picture.

Our overall take-away is that the past twelve months have seen deteriorating growth, as Coke has been losing share globally, mostly in U.S. NCBs. The continuous declines of the CSD category in the United States and the weaker performance of the global business recently has led management in its Q2'16 earnings to revise its FY16 growth guidance to 3% on the top line from 4-5% originally.

We view the issue as more structural than temporary. As Coke underindexes to NCBs globally and NCBs continue to grow by midsingle digits versus CSDs at only 1%, the growth algorithm does not stack up in Coke's favor. Coke is currently benefiting from only NCB category growth in the United States and CSD category growth abroad, but it's losing at least marginal share in both.

Figure 22: Coke's Global Retail Sales Growth over the Past Year Has Come from the Category, with Some Marginal Share Loss Offsetting It($ in billions) Category Coke Impact on Coke Coke

YAG Sales Growth YAG Sales Share Category Share TY SalesUS - CSD 26.7 (1%) 10.4 39% (0.1) 0.1 10.3US - NCB 33.7 8% 7.1 21% 0.6 (0.2) 7.4Int'l - CSD 34.1 2% 22.5 66% 0.5 (0.0) 23.0Int'l - NCB 39.6 3% 2.1 5% 0.1 0.1 2.3

134.0 42.1 1.0 (0.1) 43.1

Source: Nielsen xAOC+C, Nielsen International, Credit Suisse estimates.

Coke is benefiting internationally from its very high share of CSD (66%), so category volume growth of only 2% drove 76% of Coke's international business. Now the flipside of

15 September 2016


this high market share is that it will be difficult to grow or even to maintain; in other words, it's Coke's to lose, and that's actually what has taken place over the past twelve months.

The only way Coke will meet its business target would be to develop a sizable NCB business internationally: tea with a Honest Tea/Fuze dual approach, coffee leveraging Georgia Japan platform or Illy partnership, water (Smartwater), and value-added dairy. We see those platforms as longer plays as we will discuss later in this report.

Two Major Catalysts, but Both Are Already Priced InRefranchising Catalyst Has Passed, with Nothing New on the HorizonThe refranchising will reduce assets and fixed costs at the consolidated level, and it gives the operational execution to the bottlers, which is their strength. The refranchising essentially transforms Coca-Cola into mostly a marketing company.

However, Coke has been here before. The company used to operate as a franchise model before it bought up the bottlers in 2010. Coke has done some restructuring and is setting up in the United States essentially a new business arrangement with clearly defined roles and responsibilities. Coke in essence will now go back to what it does best: building strong global brands and managing a franchise system. We think ultimately it's the right move for the company to make, but we have a hard time becoming overly excited, given it's almost a reversion to square one in a sense.

Refranchising Redefines the Algorithm and Reduces RiskHere we provide a brief summary of the refranchising as we understand it:

Scope: From the beginning to the end, about 40% of the Coke business would have been refranchised. Coke claimed only 3%* of the volume will still be operationally managed directly at the end of 2017 (2/3rds of India, parts of Southeast Asia, and a few countries in Central America), but even those territories are aimed to be refranchised once strong local partners will emerged. In the United States, the company will sell all its 39 remaining cold-fill (CSD/water) production facilities to its franchise partners but retain ownership of the hot-fill (isotonics/premium juices including chilled/other noncarbonated beverages) production facilities as well as the dairy-based business and the on-premise channel.

Timing: Earlier this year at the CAGNY conference, Coke announced the accelerated refranchising of North American assets. Management is now targeting to refranchise 100% of the company-owned North American bottling territories by the end of 2017. It also expects China and other major regions to be complete by the end of 2017. Germany closed at the end of May, and South Africa closed at the beginning of 3Q.

Expected Outcome for Coke: In our view, the result is nothing new for Coke. However, we do think that it will make the company more nimble in the long term. We estimate it will reduce the sales base by more than 30% through 2018 but will drive margins 11 pts higher. This translates to only around $200M of lost operating profit on a $10.4B base, or less than 2%. As we outline in Figure 23, we also expect it will reduce capital spending by more than $1B, making the company less capital intensive with ultimately lower risk. With lower fixed expenses and higher returns, this would increase FCF conversion.

*in our model, we accounted for 5% end of 2017, 3% end of 2019

15 September 2016


Figure 23: The Look of the Income Statement Will Change, but the Overall Impact Will Be Accretive to Margins and Returns

FY15A Change FY18A

Sales 44,257 (14,437) 29,820

Operating Profit 10,373 (154) 10,219Margin 23% 34%

Capex 2,553 (1,360) 1,193D&A 1,970 (970) 1,000

Free Cash Flow 7,975 (282) 7,693Conversion 18% 26%

EPS 2.00 (0.03) 1.97


When we look more closely at the different segments, some explanations need to be added to explain our model assumptions.

Figure 24: After Refranchising, We Expect N.A. to Be the Largest Contributor to Sales and Profit, Although Margins Will Still Be Structurally Lower than Peers

8%

18%14%

36%

18%

5%8%

24%

20%

29%

19%

0%

Eurasia & Africa Europe Latin America North America Asia Pacific BottlingInvestments

Rel

ativ

e S

ize

of S

egm

ent

Segment Contribution, Post-Refranchising

Sales Profits

38% 53% 52% 31% 39% 2%

Ope

ratin

gM

argi

n

Source: Company data, Credit Suisse estimates.Note: For BIG, we expect the remaining ~2% of refranchising will fall into FY19.

■ The remaining 5% of bottling operations are dilutive, but they are here to stay for at least a few years. The bottling operations currently have combined operating margins of around 3%, which is highly dilutive to the consolidated segment margin. Excluding the bottling group, the segment operating margin would be around 40% compared with 23% today. (This ignores the impact of corporate expense and eliminations.)

By our estimates, the countries that will remain in the bottling segment likely have the lowest margins of all. This means that combined margins will still be slightly depressed but with a much lower sales base ($21B lower in our model), so the consolidated impact is much less significant. (We figure only around 1-2 pts dilutive to segment margins versus the nearly 20 pts of dilution we calculated in the above paragraph.)

15 September 2016


■ Structurally lower margins will remain in North America. Coke's North America segment is much lower owing to the on-premise (fountain) operating business and the hot fill/aseptic business it is keeping in house. With long-term contractual commitments with key customers such as McDonald's, for which margins are probably very thin, and no room to renegotiate pricings for years, things are unlikely to improve on that front. By our math, the on-premise business in about 5 pts dilutive to North America segment margins, which brings the profitability to 31% ex on-premise. If we also remove the hot fill/aseptic business, we calculated the concentrate-only operating margin should be 55%, which is in-line with the balance of Coke concentrate operations. This is still lower than the Dr Pepper concentrate (65%) but better than the Monster co-packing/concentrate model (43%).

Figure 25: Coke's North America Concentrate Margin Is Below Dr Pepper Snapple but on Par with the Europe Margin

55% 56%

65%

43%

20%

30%

40%

50%

60%

70%

KO N.A. Concentrate KO Europe DPS Concentrate MNST Co-Packing /Concentrate

Ope

ratin

g M

argi

n (%

)

Concentrate Model Operating Margin Benchmark


■ International profitability seems reasonable. At first glance, one could wonder why operating margins differ so much from one region to the other. We think Coke is earning a fair and sustainable margin in each of its major regions outside of North America. With the exception of Latin America (where Coke has a commanding competitive stronghold), retail pricing and reported operating margins are closely related to one another.

The reason margins vary from market to market is because we believe the company sets concentrate price according to what the local market will support, despite fixed costs of its concentrate being similar in each market. This is the principle of the new franchise model. This creates a dynamic in which markets or regions that demand lower price points have a proportionally lower margin. It might seem obvious that price and margins are related, but in Figure 26, we highlight the strength of that relationship for Coke internationally.

15 September 2016


Figure 26: International Market Retail Pricing and Margins Are Very Closely Related

0.60

0.70

0.80

0.90

1.00

1.10

1.20

30%

35%

40%

45%

50%

55%

60%

Eurasia & Africa Europe Latin America Asia Pacific

Ret

ail P

rice

per L

iter (

$)

Ope

ratin

g M

argi

n (%

)

Relationship of Price and Margin

Margin Price

Source: Company data, Nielsen International.

In Our View, Coke's New Deal with Its Bottlers Is a More Defining Change The new Coke deal structure with the bottlers goes hand in hand with the refranchising and is an important change in the modus operandi. In short, the incentive moves from volume to revenue, which Coke calls incident based. It's also important to consider that the incidence is not calculated on an average of the total revenue but rather calculated brand by brand and for specific brands by pack. In essence, the goal is to achieve better alignment between Coke and its bottlers, as they will have aligned interests to grow revenue. This contrasts with the past when Coke was pushing for volume and bottlers for revenue.

When speaking with Coca-Cola European Partners, Coke's Western Europe bottlers, management mentioned several times this new deal structure will enable better alignment and even greater efficiency. At Beverage Digest Market Smart on June 13, Sandy Douglas (president of Coca Cola North America) said the company is now "focused on revenue rather than gallons" and that "this will help drive small and premium SKUs that are highly profit accretive."

Hence we expect more growth to come from the price/mix line rather than the volume line as in the past as well as a better use of A&P.

Monster Gives Coke What It Couldn’t Get on Its OwnEnergy is one of the fastest growing beverage segments in the world, outpacing total carbonates by 8-10 pts over the past few years, per Canadean Intelligence. The energy category has been growing at the expense of the CSDs, reaching a younger consumer base that used to be Coke and Pepsi's bread-and-butter business.

15 September 2016


Figure 27: Energy Is Outperforming CSD Globally

0%

10%

20%

30%

40%

Vol

ume

Gro

wth

(%)

Global Carbonates vs Energy Performance

Carbonates Energy Drinks

Source: Canadean Intelligence.

Coca-Cola paid US$2.15 billion for a 16.7% stake in Monster Beverages. This includes Coke‘s transfer of ownership of all its energy brands to Monster (e.g., Full Throttle, NOS, Burn, Relentless, and Mother) and Monster‘s transfer of ownership of all its nonenergy brands to Coke (e.g., Hansen‘s Natural Sodas and Peace Tea). The Coca-Cola Company and Monster also extended their current distribution agreement in the United States and Canada by expanding into additional territories and entering into long-term agreements. Coke has an option to acquire up to 25% of Monster in the open market.

While the deal is certainly a positive for Monster in a number of ways, it's also very beneficial for Coke and the bottlers. Monster has been selectively successful in establishing itself internationally against Red Bull. We think, with the power of the Coke system behind it, Monster will be very successful at rapidly expanding around the world.

15 September 2016


Figure 28: We Estimate These Markets Make Up About One-Half of Monster's Current International Business, and That Market Share Can Increase Meaningfully in Each Country

Share Market Status of BottlerMonster Coke 1 Leader Negotiations and Comments

UK ~15% ~10% Red Bull CCE complete

France ~18% ~8% Red Bull CCE complete

Germany 0% < 5% Red Bull CCE complete

Spain ~25% ~40% Monster CCE complete; mostly Coke legacy share

Italy ~10% ~15% Red Bull Hellenic complete

Russia < 5% 0% PepsiCo Hellenic complete; just launched

Brazil < 5% 0% Red Bull FEMSA incomplete

Mexico ~28% ~12% Monster FEMSA incomplete

China 0% 0% Local Delayed until late 2016

India 0% 0% Red Bull Relaunching late 2016

Source: Nielsen International data; Credit Suisse estimates.1. Legacy Coke brands, now owned by Monster Beverage

Monster has two new innovations planned for this year, and one of them has definitely a specific interest for KO.

The one we think has the most legs is Mutant, - an energized CSD with higher caffeine content that is intended to compete with PepsiCo's Mountain Dew, which has been one of PepsiCo's largest successes, especially in the convenience channel. Mutant is probably one of the most ambitious innovations that Monster has undertaken in the past few years, as it is entering directly into the CSD category and will have to manage lower price points and hefty competition.

This could be a really significant product for Coke. If Monster is able to place Mutant into the CSD aisle rather than the energy aisle and near Mountain Dew (something Coke bottlers can help with), we could imagine that most of Mutant sales will be incremental to Monster and it could take share from Mountain Dew. However, if Mutant is kept in the energy aisle, the most probable outcome in our view is that sales will just cannibalize the more profitable Monster range and Monster will probably stop the experience.

If it is successful, it will finally give Coke what it has been unable to do for many years, which is create a legitimate competitor to Mtn Dew. This likely explains why Monster has been authorized to play outside the contract-restricted energy space in this case. We believe in the success of Mutant and think Coke does too, as Mutant will be the first Monster product for which KO will manufacture the concentrate.

15 September 2016


Figure 29: Coke's Potential Trojan Horse Answer to PepsiCo's Mtn Dew


What It Means for Our Numbers: Using consensus estimates for Monster given Coke's nearly 17% interest, we estimate an annual $0.02-0.05 EPS impact through 2018. We don't think the impact of Mutant on Monster earnings will be material for Coke in that time frame.

Lack of Reinvention Could Hold Coke BackHeadwinds Here to StayOver the years, Coke has been at the forefront of health and wellness concerns related to CSDs and colas specifically. This has (and does) include negative press around the caloric content leading to obesity, concerns about corn-based sweeteners such as HFCS, and the safety of other artificial sweeteners.

This has spurred increased regulation and, in some cases, taxation of sweetened beverage products. In 2013, Mexico implemented a 10% tax on sugary drinks. New York City tried to pass similar legislation, but it ultimately failed. However, in early 2016, Philadelphia passed a $0.015-per-ounce tax on sodas. This could open the door for other municipalities, or even states, to attempt the same. Similarly, outside of the United States, taxation at a high(er) level seems to be emerging with the recent announcements in South Africa and the United Kingdom.

15 September 2016


Figure 30: Volumes Have Been Consistently Declining Owing to Health and Wellness Concerns Fueled by Negative Press and Regulatory Pressures

(3%)

(2%)

(2%)(2%)

(4%)

(3%)

(2%)

(1%)

0%

2013 2014 2015 LTM

Ret

ail V

olum

e G

row

th (%

)

US CSD Category Retail Volume Growth

CSD Volume


It used to be that a CSD manufacturer could launch a new diet version of a core brand (i.e., Diet Coke Lime, etc.) and that that was good enough to help build the top line. This is not true anymore, as diet is actually declining faster than regular colas owing to concerns with artificial sweeteners such as aspartame. The only positive for the bottom line has been the recent development of 8oz cans that are sold at a premium. While answering to consumers and governments for smaller sizes and calorie reductions per serving (100 for an 8oz can versus 150 for a 12oz can). The success of those smaller cans will help mitigate profit dilution from category declines.

In addition, the R&D/formulation difficulties with stevia (thought to be the more natural alternative) will likely keep diet versions from rebounding.

New Initiatives Unlikely to Change the TideMidcalorie Options Sweetened with Stevia Have Not Been Resonating with Consumers (Yet): In the United States, Coke Life is now disappearing from the shelves, with sales in the most recent Nielsen data (08/13/16) down 45% in the past 12 weeks (down 37% in the past 52 weeks).We see similar results internationally. When we look at Coke Life results in the United Kingdom, where consumers are more than everywhere else rejecting excess calories in soft drinks, results have been disappointing nearly from day one.

15 September 2016


Figure 31: Coke Life, Sweetened with Stevia


Coke Life was launched in the summer of 2014, and despite rapid distribution gains and marketing support plus a decent trial, repeat purchase never really happened and same-store sales started to decline only three months after the launch. The product essentially didn't taste good enough in comparison with Coke Classic. As CCEP management told us, the Holy Grail of zero-calorie sweeteners still doesn’t exist (i.e., good tasting and natural). That's probably right, and nothing is leading us to believe things will change in the near term.

Figure 32: Coke Life in the United Kingdom Performed Well at First Thanks to Rapid Distribution Gains, but Share Has Declined Steadily Since

(4%)

(2%)

0%

2%

4%

6%

8%

Ret

ail S

hare

(%)

Coke Life UK Retail Value Share

Distribution-led Share Same Store Sales Share Total Sales Share

Source: Nielsen International, Credit Suisse.

Coke Recently Announced a One-Brand Strategy Centered on the Classic Red Label and Red Disk: It's definitely too soon to say, but we don't think it will materially change the trend. We understand why the company is doing it. (It has been well documented.) While we see benefits in combining the communication around the four brands, we are concerned around the packaging changes. We see the following potential risks to the success of this move.

■ For on-shelf execution, while the design (as featured in Figure 33) seems straightforward, it's hard to believe the products will all be facing the consumer the

15 September 2016


same way. It's most likely that bottles or cans will turn randomly on the shelf and loose the original intent of one unified brand.

■ One product in the line-up would need to change its name moving from Diet Coke to Coca-Cola Diet (or Light depending on the country). This seems to us too much of a stretch for an already difficult segment.

■ The fact that the United States is not doing it from day one is not a good sign; its being tested internationally first.

We could be wrong, and our view is certainly debatable, but it seems to be far from a home run to us.

Figure 33: Coke's New One-Brand Strategy Is a Play on the Classic Red Can, with Color Variations for the Zero, Diet/ Light, and Life brands


Smartwater International Expansion Is Off to a Good Start, but We Think the Impact on Coke Sales and Income Will Be Limited: When Coke bought Glaceau for $4.1B in May 2007, few if any would have thought the gem was in Smartwater. After a successful ride in the United States, now also available in sparkling, Smartwater was launched internationally in the United Kingdom in 2014. Despite the United Kingdom being a natural spring water country and the very bad experience of Dasani aborting its launch in 2004, Smartwater has been successfully launched in the United Kingdom. (See Figure 34.) Building on this first success, further launches are expected in Europe by Coca-Cola European Partners and in Australia by Coca-Cola Amatil. Unlike Coke Zero, we think it will be a slow rollout and that the royalties Coke will receive for the brand and technology will be minimal in comparison with the concentrate revenue of a CSD.

15 September 2016


Figure 34: Smartwater Continues to Take Share in the United Kingdom, Now Being Led by Same-Store Growth over New Distribution

0%

1%

2%

3%

4%

Ret

ail S

hare

(%)

Smartwater UK Retail Value Share

Distribution led m/s Same store sales m/s

Source: Nielsen International, Credit Suisse.

Investments in New Growth Platforms Such as Added-Value Dairy: There have been numerous initiatives in value-added dairy recently from Coke and also from other global beverage players such as Danone, which just acquired WhiteWave. Coke's recent investments are Chi (Nigeria), Xiamen Culiangwang (China), and Fairlife in the United States, and more recently, together with FEMSA, it bought AdeS in Latin America from Unilever for $575M. All this seems to make sense.

The only question mark that we have is that it doesn't appear as a global strategic move. When speaking with management, we asked specifically about it, and the response was that it was more locally/regionally driven initiatives supported by M&A to explore and understand the space. We believe the impact will be minimal and it's too soon to say, even if we think there is an interesting space for branded dairy beverages. It all remains to be seen.

Figure 35: Coke's Most Recent Investments in Value-Added Dairy


Through Its Venture Emerging Brands (VEB), Coke Seeks to Find and Develop the Next Generation of Brands with Billion Dollar Potential: This structure together with LA

15 September 2016


Libations is adding new capabilities to Coke to incubate and partner with new entrepreneurial brands. As claimed by VEB, the objective is to find brands poised for market disruption that have the potential to be scalable and generate a billion dollar revenue.

We are positive about VEB and these kinds of initiatives. Most of the U.S. beverage players have their own incubation/venturing arm such as Allied Brands at Dr Pepper Snapple or Alchemy & Science at Boston Beer. VEB is set up for the long run as it should be. The stats are saying that five years after Proof of Concept, one of ten of those entrepreneurial brands will reach $100M revenue. Honest Tea, for example, graduated from VEB to the Coke system, but after a few years, it still sells for only less than $150M in U.S. retail.

Figure 36: VEB Helps Promising Brands Navigate the Growth Process and Scale to Win


In conclusion, despite promising initiatives outside of its core such as VEB, Smartwater, or added-value dairy, it seems to us Coke is still shy of defining its new frontier. We think management is probably quite occupied with successfully transitioning 40% of its core business to new or existing bottlers, and rightly so. A larger acquisition in value-added dairy, tea, or water could be the game-changer Coke would need, but as of now, it all adds up to a lack of a sizable catalyst for us. Until this happens, we can't see the Coke business outperforming the category by the end of 2018.

The challenge may be now to invest in businesses that are inherently dilutive to the reinforced highly profitable concentrate model. It's difficult to find an accretive business when your core is operating at a 34%+ margin.

A la Nestlé, Outside Perspective Could Usher in ReinventionThere has been a growing body of research over the years that suggest firms tend to overpay for outside talent that often ends up disappointing anyway. As an alternative, many firms have opted to grow top managers from within the organization who, after years on the inside, understand both the culture and the operations. This has been Coke's model for developing its top talent. Here are a few statistics to support that point:

■ The average tenure of board members is 10.7 years at Coke and 6.0 years at PepsiCo.

■ Coke's CEO Muhtar Kent has been at the company for 30 years.

15 September 2016


■ Coke's CFO Kathy Waller has been at the company for 27 years.

■ Coke's COO James Quincy has been at the company for 20 years.

■ Coke's CMO Marcos Quinto has been at the company for 34 years.

■ The average age of members of the board of directors at Coke is 65.

We are not saying there is inherently anything wrong with having seasoned corporate managers. However, in Coke's case, it strikes us that a lack of outside perspective and creativity could ultimately be what holds Coke back.

15 September 2016


ValuationOur $44 target price implies a nominal 5% upside potential to the shares. Our valuation assumes a 23x P/E on our CY18 EPS estimate. This is a premium to where we price PepsiCo shares and a slight premium to the level at which U.S. Staples currently trade, which is better than the 6% two-year historical average discount.

Relative to PepsiCo, we think the company should trade at a premium multiple owing to Coke's new asset-light, lower-risk model. To support this, we looked at the restaurant industry and found that the highly franchised models (especially within QSRs) tend to trade at higher multiples than the ones with more company-owned locations. This tends to hold true in terms of P/E, but even more so for EV/EBITDA. Therefore, we think it is fair to value Coke at a slight premium to PepsiCo on a P/E basis and a steeper premium on an EBITDA basis owing to the structurally lower depreciation expense associated with the nearly fully franchised model.

Our SOTP analysis supports our valuation, assuming the following:

■ Eurasia & Africa at 18x; discount to Latin America and Europe

■ Europe at 19x; at a premium to North America because it is a pure concentrate model, so the margin structure is higher

■ Latin America at 19x; at parity with Europe because Coke has a commanding market share in the region and it’s a pure concentrate model

■ North America at 17x; at a premium to PepsiCo North America Beverages owing to stronger market share in CSD but at a discount to Coke Europe because the margin structure is lower owing to the fountain and hot fill business

■ Asia Pacific at 18x; at parity with Eurasia & Africa

■ Bottling Investments at 10x; in-line with bottling multiple (CCE)

Figure 37: Our SOTP Valuation Supports Our Target Price

Sum of the Parts CS FY18E Value

($ in millions) Sales ($) EBITDA ($) Margin (%) EBITDA (x) Ent V ($) Notes

Eurasia & Africa 2,483 1,013 41% 18.0x 18,233 Discount to LatAm and EuropeEurope 5,316 2,951 56% 19.0x 56,062 Premium to NA bc pure concentrateLatin America 4,324 2,378 55% 19.0x 45,190 Premium to NA bc pure concentrateNorth America 10,757 3,604 34% 17.0x 61,266 Prem to PEP NA Bev, Disc to Eur for OP / HFAsia Pacific 5,511 2,304 42% 18.0x 41,469 Discount to LatAm and EuropeBottling Investments 1,588 79 5% 10.0x 795 In-line with avg bottling multiplesCorporate 0 (1,110) NA 18.0x (19,980) Segment average

Sub total 29,980 11,219 37% 18.1x 203,034

Minority Interest 1,070 12.5x 13,375 Combo of MNST and bottler multiplesTotal 12,289 17.6x 216,409

Less: Current Net Debt 23,358Total Equity Value 193,051

Current Shares 4,369Value per Share 1 $43

1. Discounted back 0.3 years from FY18 to represent the expected stock price using a NTM multiple, one-year from today


15 September 2016


Figure 38: KO Currently Trades at a 2% Discount to U.S. Staples Peers, Which Is Slightly Better Than the Historical Average

(20%)

0%

20%

40%

5x

10x

15x

20x

25x

Sep 08 Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16

Pre

miu

m /

(Dis

coun

t) to

Pee

rs (%

)

Abs

olut

e M

ultip

le (x

)

KO P/E [Left] KO Prem / (Disc) to Peers [Right] 2-yr Rolling Avg [Right]

Source: Thomson Reuters, Credit Suisse.

Relative Value of the Operations ■ North America Beverages: We apply a higher multiple to Coke's North America

business (17x) than we do to PepsiCo North America beverages (15x). PepsiCo is more than twice the size of Coke in terms of sales, but Coke's profit margins are nearly double those of PepsiCo. Overall, we think the two are worth approximately the same enterprise value.

■ International Beverages: Coke is the winner in terms of valuation multiples, size, scale, margins, and enterprise value.

Figure 39: Coke's Beverage Business Is Worth Significantly More than PepsiCo Beverage Business, Driven by the Strength of the International Operations

$61

$161

$61

$18

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

N.A. Bev Int'l Bev

Ent

erpr

ise

Val

ue ($

BB

)

Relative Beverage Valuations for Coke vs PepsiCo

Coke Pepsi34% 18% 49% 18%EBITDA Margin


15 September 2016


Risks to Our ThesisIncreased RegulationThe debate as to whether sugar is the next tobacco is older than we can remember. Despite numerous attempts at limiting consumption of sweetened drinks and snacks by regulators around the world, consumers continue to enjoy these products, and global volume growth for the most part remains stable, although it is declining in many developed markets.

Philadelphia recently passed a sweetener beverage tax, which could open the door for other major municipalities to try. This previously failed in New York City under Mayor Michael Bloomberg, but we wouldn’t be surprised if the city government tries again now that the tax in Philadelphia passed.

That said, we see little reason to support the argument that CSD stocks should trade at a discount as a result of regulatory risk factors. Such regulations may have temporary impacts on volumes (as seen in Mexico), but sales tend to recover relatively quickly. The negative press about sugar and artificial sweeteners is not new news; therefore, we don’t think volume declines would accelerate given these additional external pressures.

Declining Global CSD CategoryCSD volumes have been falling for over a decade in the United States and are starting to show signs of trouble internationally. The media, particularly in the United States, has been drawing negative attention over the high sugar content of regular CSDs, which has exacerbated consumers’ negative perceptions about the category overall. In addition, health concerns related to artificial sweeteners has had an impact on the diet segment. Even though anemic CSD growth continues to be a drag in the United States, innovation in select segments has been a positive.

This is especially troublesome for Coke, given the heavy weighting of its global portfolio toward CSD. We think this is somewhat mitigated by the faster growing NCB portfolio, but that is still relatively small in comparison.

Executional Issues Related to RefranchisingMajor corporate reshufflings can be a huge drain on management time and resources, which can ultimately distract top managers from doing what they are there to do: manage the business. Coke currently has a lot going on, from refranchising to tack-on acquisitions to its partnership with Monster, not to mention managing a declining CSD business. If any management team is up to the task, we think Coke's will handle it with precision and expertise. However, we think it's worth mentioning that these types of things can lead to missteps.

15 September 2016


Company BackgroundDescriptionBusiness OverviewIncorporated in 1919 and headquartered in Atlanta, Georgia, The Coca-Cola Company is the world's largest beverage company. It owns/licenses and markets more than 500 nonalcoholic beverage brands in more than 200 countries. The company primarily offers sparkling beverages but also has a variety of still beverages such as water, enhanced water, juices, ready-to-drink teas and coffees, and energy and sports drinks. The company owns four of the world's top five nonalcoholic sparkling beverage brands: Coca-Cola, Diet Coke, Fanta, and Sprite. The company markets and manufactures beverage concentrates and finished sparkling and still beverages. The company reports six operating segments:

Figure 40: Sales by Segment (Prerefranchising)Figure 41: Operating Profit by Segment (Prerefranchising)

Eurasia & Africa

5% Europe10%

Latin America

8%

North America

20%

Asia Pacific11%

Bottling Investments

46%

Eurasia & Africa

9%

Europe25%

Latin America

19%

North America

22%

Asia Pacific19%

Bottling Investments

6%

Source: Company data, Credit Suisse.Represents prefranchising; does not take into account Eliminations or Corporate

Source: Company data, Credit Suisse.Represents prefranchising; does not take into account Corporate

The other popular brands of The Coca-Cola Company are Minute Maid, Powerade, Dasani, Simply, Gold Peak, and Fuze tea, among others. In addition to the beverage brands, it also provides sales, marketing, and distribution support to other nonalcoholic beverage brands through licenses, joint ventures, and strategic partnership. The company sold 29.2 billion unit cases in fiscal 2015.

Partnerships and AgreementsThe Coca-Cola Company manufactures and distributes its products through a network of company-owned and -controlled and independent bottlers. The company signs bottling agreements to manufacture and distribute products owned by The Coca-Cola Company. In addition to its product, the company also provides marketing, sales, and distribution support to other nonalcoholic brands through licenses, joint ventures, and partnerships.

■ Certain company bottlers distribute brands of Monster Beverage Corporation.

■ The company also produces and distributes certain brands of Dr Pepper Snapple Group in the United States and Canada under license agreement with Dr Pepper Snapple.

15 September 2016


■ It also has a strategic partnership with the Aujan Industries Company, one of the largest independent beverage companies in the Middle East, for production and distribution of its products.

■ The company also operates through a joint venture with Nestlé SA named Beverage Partners Worldwide, which markets and distributes Nestea products in Europe and Canada under agreements with its bottlers.

GovernanceManagement Team ■ Muhtar Kent (63)—Chairman of Board and Chief Executive Officer: Mr. Muhtar

Kent has been chairman of the board of directors and chief executive officer of The Coca-Cola Company since April 2009. He joined the company in 1978 and has held various leadership positions, including president and chief operating officer of the company's North Asia, Eurasia, and Middle East Group operations. He later became president of Coca-Cola International, leading the company's operations outside North America. He received a bachelor of science in economics from the University of Hull and a master of science in administrative sciences from the Cass Business School, London.

■ James Quincey (51)—President and Chief Operating Officer: Mr. James is president and chief operating officer at The Coca-Cola Company since August 2015. He joined the company in 1996 as director and has served as president of The Coca-Cola Company's Europe Group. Before joining Coca-Cola, Mr. Quincy was a partner consulting at the Kalchas Group. He received a bachelor's in electronic engineering from the University of Liverpool.

■ Marcos de Quinto (51)—Executive Vice President and Chief Marketing Officer: Mr. de Quinto joined the company in 1982 and currently serves as executive vice president and chief marketing officer. He received a bachelor's in economics from Complutense University and an MBA from the Instituto de Empresa in Madrid.

■ Kathy N. Waller (57)—Executive Vice President and Chief Financial Officer: Ms. Waller has been executive vice president and chief financial officer at The Coca-Cola Company since May 2014.. She joined the company as a senior accountant in 1987 and has served in various accounting and financial roles within the company. Prior to her current role, she served as vice president, finance and controller with an additional responsibility for corporate treasury, corporate tax finance capabilities. She received her bachelor’s and MBA from the University of Rochester and is a CPA.

■ J. Alexander M. Douglas, Jr. (54)—Executive Vice President and President Coca-Cola North America: Mr. Douglas is executive vice president and president of Coca-Cola North America. He joined the company in 1988 as a sales manager for the Coca-Cola USA division. Since then, he has served in a variety of positions with increasing responsibility in Coca-Cola USA. Prior to his current role, he was senior vice president and global chief customer officer. He received a bachelor's from the University of Virginia and began his career at P&G.

■ Irial Finan (58)—Executive Vice President and President–Bottling Investments Group: Mr. Finan is executive vice president and president of the Bottling Investment Group, a multibillion dollar bottling business owned by the company. He joined the company in 1981 and held various positions including CEO for Coca-Cola HBC. He received a bachelor of commerce from the National University of Ireland and is an associate of the Institute of Chartered Management Accountants.

15 September 2016


Executive Compensation

Figure 42: Summary of the Annual Executive Compensation Scheme in FY15FY15 Weight Target Actual Payout

Profit Before Tax Growth 50% 4-5% 5.50% 102%Sales Growth 25% 3-4% 3.50% 100%Unit Case Volume Growth 25% 2-3% 2.50% 100%

111%

Source: Company data.

15 September 2016


HOLT® AnalysisFigure 43: HOLT P/B vs. CFROI® Scatter Chart

Source: Company data, HOLT.

Figure 44: Growth vs. CFROI Bubble Chart


15 September 2016


Figure 45: HOLT Condensed RWC Chart


KO Segment CFROI & Drivers: Capital intensive BIG (Bottlers) earns the lowest returns. APAC has the highest asset efficiency and earns the highest CFROI levels.

Figure 46: Segmental Benchmarking


The CFROI® chart at the top of Figure 47 is a reflection of our forecasts for sales, margins and asset turns. While we forecast top line to decline during 2016 to 2018 due to restructuring activities; a robust margin expansion of 900bps translates into steady return levels of c.16%.

From a valuation perspective, we use a 20-year explicit forecast window for KO. Over the long term we normalize nominal sales growth to c.4.5%. Given this assumption, the market is pricing in significant improvement in EBITDA margins over the next 20 years to reach c31% by 2035.

15 September 2016


Beyond the explicit 20-year window for KO, HOLT assumes the CFROI and discount rate fade to 6.0%, while the asset growth fades to 2.5%—incorporating the economic reality of competition and causing returns and growth to regress to the mean.

Figure 47: HOLT—Credit Suisse Analyst Scenario Data

Current Price: USD 42.11 Warranted Price: USD 42.55 Valuation date: 15-Sep-16

Warranted upside/downside sensitivity to growth and margins Summary of CS Research projections and key operating driversLong term sales growth Dec 14A Dec 15A Dec 16E Dec 17E Dec 18E

USD 2.5% 3.5% 4.5% 5.5% 6.5% Sales Growth, % -1.8 -3.7 -6.4 -14.2 -16.1EBITDA Mgn, % 27.1 27.7 27.7 27.7 27.7Asset Turns, x 0.70 0.7 0.7 0.7 0.7

CFROI®, % 14.5 17.1 17.2 18.9 21.4Disc Rate, % 4.3 3.9 3.4 3.4 3.4Asset Grth, % 5.1 -10.0 -6.0 -15.3 -18.1

Value/Cost, x 3.7 4.0 4.3 4.7 5.3Economic PE, x 25.5 23.2 25.2 24.9 24.5Leverage, % 20.3 21.4 21.3 20.9 21.0

More than 10%

downsideWithin 10% More than

10% upside

Source: Credit Suisse HOLT®

Source: Credit Suisse HOLT®. CFROI and HOLTare trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries.

62.98

32.5% 32.58 37.92 44.25 51.78 60.76

33.5% 33.91 39.43 45.96 53.73

47.89 54.06

31.5% 31.25 36.42 42.55 49.84

HO

LT

- C

redi

t Sui

sse

Ana

lyst

Sce

nari

o D

ata

COCA-COLA CO (KO)

Long

term

EBI

TDA

mar

gins

29.5% 28.59 33.41 39.13 45.94

58.53

54.06

30.5% 29.92 34.92 40.84

0

5

10

15

20

25

30

35

40

2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035Historical Forecast based on Research projection

Long term projections Discount Rate

CFROI & Discount Rate (in %)

0

5

10

15

20

25

30

35

2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035Historical Forecast based on Research projection Implied by current market price

EBITDA Margin (in %)

-15

-10

-5

0

5

10

15

2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035

Historical Forecast based on Research projection Long term projections

Sales Growth (in %)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035

Historical Forecast based on Research projection Long term projections

Asset Turns (x)


15 Septem

ber 2016

The Coca-C

ola Com

pany (KO

)37

Figure 48: Income Statement Income Statement 2015 2016($US in millions, except per share) FY12 A FY13 A FY14 A 1QA 2QA 3QA 4QA FY15 A 1QA 2QE 3QE 4QE FY16 E FY17 E FY18 E

Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16

Net Sales 48,032 46,935 46,012 10,703 12,149 11,400 10,005 44,257 10,329 11,524 10,488 9,096 41,438 35,547 29,820 y-o-y growth % 3.2% (2.3%) (2.0%) 1.1% (3.2%) (4.8%) (8.2%) (3.8%) (3.5%) (5.1%) (8.0%) (9.1%) (6.4%) (14.2%) (16.1%)

Costs of Goods Sold 19,033 18,371 17,902 4,106 4,772 4,484 4,054 17,416 4,117 4,553 4,090 3,457 16,217 12,633 9,612 Gross Profit 28,999 28,564 28,110 6,597 7,377 6,916 5,951 26,841 6,212 6,971 6,398 5,640 25,221 22,913 20,208

Gross Margin 60.4% 60.9% 61.1% 61.6% 60.7% 60.7% 59.5% 60.6% 60.1% 60.5% 61.0% 62.0% 60.9% 64.5% 67.8%

Selling, General, and Admin 17,749 17,304 17,156 4,089 4,223 4,211 3,945 16,468 3,765 3,921 3,880 3,711 15,277 12,600 9,989 Other Expenses / (Income) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Total Operating Expenses 17,749 17,304 17,156 4,089 4,223 4,211 3,945 16,468 3,765 3,921 3,880 3,711 15,277 12,600 9,989 SG&A Margin 37.0% 36.9% 37.3% 38.2% 34.8% 36.9% 39.4% 37.2% 36.5% 34.0% 37.0% 40.8% 36.9% 35.4% 33.5%

Operating Profit 11,250 11,260 10,954 2,508 3,154 2,705 2,006 10,373 2,447 3,050 2,518 1,929 9,944 10,313 10,219 Operating Margin 23.4% 24.0% 23.8% 23.4% 26.0% 23.7% 20.0% 23.4% 23.7% 26.5% 24.0% 21.2% 24.0% 29.0% 34.3% y-o-y growth % 1.8% 0.1% (2.7%) 2.0% (5.2%) (4.8%) (13.9%) (5.3%) (2.4%) (3.3%) (6.9%) (3.8%) (4.1%) 3.7% (0.9%)

EBITDA 13,232 13,237 12,930 2,981 3,642 3,187 2,533 12,343 2,905 3,495 3,010 2,503 11,914 11,813 11,219 EBITDA Margin 27.5% 28.2% 28.1% 27.9% 30.0% 28.0% 25.3% 27.9% 28.1% 30.3% 28.7% 27.5% 28.8% 33.2% 37.6% y-o-y growth % 0.0% (2.3%) 1.7% (4.7%) (4.9%) (10.4%) (4.5%) (2.5%) (4.0%) (5.5%) (1.2%) (3.5%) (0.8%) (5.0%)

Interest Expense 397 410 483 127 128 138 143 536 141 162 144 144 591 591 591 Interest (Income) (471) (534) (594) (155) (149) (155) (154) (613) (144) (164) (70) (74) (452) (280) (292)Equity (Income) / Loss (822) (770) (762) (75) (209) (197) (95) (576) (95) (323) (250) (250) (918) (1,000) (1,070)Other Expenses / (Income) (71) (75) 64 (115) (209) 31 (51) (344) (38) (20) 0 0 (58) 0 0

Pretax Income 12,217 12,229 11,763 2,726 3,593 2,888 2,163 11,370 2,583 3,395 2,693 2,109 10,780 11,002 10,989 y-o-y growth % 3.4% 0.1% (3.8%) 7.3% (2.3%) (5.2%) (13.4%) (3.3%) (5.2%) (5.5%) (6.7%) (2.5%) (5.2%) 2.1% (0.1%)

Income Taxes 2,932 2,813 2,646 613 809 650 486 2,558 581 764 606 475 2,426 2,476 2,473 Tax Rate 24.0% 23.0% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5% 22.5%

Non-controlling Interests 67 42 26 9 3 4 (1) 15 10 12 0 0 22 0 0 Net Income to Common 9,218 9,374 9,091 2,104 2,781 2,234 1,678 8,797 1,992 2,619 2,087 1,634 8,333 8,527 8,517

Adj Diluted EPS $2.01 $2.08 $2.04 $0.48 $0.63 $0.51 $0.38 $2.00 $0.45 $0.60 $0.48 $0.38 $1.91 $1.97 $1.97 y-o-y growth % (47.6%) 3.4% (1.7%) 9.0% (1.5%) (4.1%) (12.4%) (2.2%) (4.5%) (5.2%) (5.8%) (1.8%) (4.5%) 3.2% 0.2%

Diluted Shares Oustanding 4,584 4,509 4,450 4,422 4,408 4,399 4,390 4,405 4,382 4,377 4,365 4,353 4,369 4,333 4,321

Sales BreakdownVolume 4% 2% 2% 8% 4% 3% (2%) 3% 0% (1%) 1% 3% 1% 1% 1% Price / Mix 1% 1% 1% 1% 0% 0% 0% 0% 2% 3% 2% 2% 2% 2% 2% Acquisitions / (Divestitures) 0% 0% (2%) (1%) 0% (0%) (1%) (0%) (1%) (6%) (10%) (12%) (7%) (21%) (24%)Currency (3%) (2%) (2%) (6%) (7%) (8%) (6%) (7%) (5%) (3%) (1%) (1%) (2%) (0%) 0% Extra week / Other 1% (3%) 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Organic Sales Growth 5% 3% 3% 9% 4% 3% (2%) 4% 2% 2% 3% 5% 3% 2% 3%



15 Septem

ber 2016

Companies Mentioned (Price as of 14-Sep-2016)ARCA CONTINENTAL, S.A.B. DE C.V. (AC.MX, MXN116.01)Boston Beer Co. Inc. (SAM.N, $165.17)Coca Cola European Partners (CCE.AS, €35.03)Coca-Cola Amatil (CCL.AX, A$9.77)Coca-Cola Femsa SAB de CV (KOFL.MX, MXN140.43)Coca-Cola HBC (CCH.L, 1663.0p)Danone (DANO.PA, €64.74)Dominos Pizza (DPZ.N, $150.3)Dr Pepper Snapple Group (DPS.N, $90.28)Dunkin' Brands Group (DNKN.OQ, $48.24)McDonald's Corp (MCD.N, $115.18)Monster Beverage Corp (MNST.OQ, $142.9)Nestle (NESN.S, SFr77.5)PepsiCo, Inc. (PEP.N, $105.05)The Coca-Cola Company (KO.N, $42.11, NEUTRAL, TP $44.0)Wendy's Company (WEN.OQ, $10.37)

Disclosure AppendixImportant Global Disclosures I, Laurent Grandet, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Dr Pepper Snapple Group (DPS.N)

DPS.N Closing Price Target Price Date (US$) (US$) Rating 23-Oct-13 46.49 50.00 N 12-Feb-14 49.99 54.00 23-Apr-14 54.48 58.00 24-Jul-14 60.98 62.00 23-Oct-14 66.95 68.00 12-Feb-15 78.30 80.00 14-May-15 77.66 NR * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price DPS.N

1- Jan- 14 1- Jul- 14 1- Jan- 15 1- Jul- 15 1- Jan- 16 1- Jul- 1640

60

80

100

N EU T RA LN O T RA T ED

3-Year Price and Rating History for Monster Beverage Corp (MNST.OQ)

MNST.OQ Closing Price Target Price Date (US$) (US$) Rating 04-Jun-14 68.10 82.00 O * 18-Aug-14 88.44 98.00 07-Nov-14 108.39 115.00 27-Feb-15 141.12 150.00 14-May-15 132.64 NR * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price MNST.OQ

1- Jul- 14 1- Jan- 15 1- Jul- 15 1- Jan- 16 1- Jul- 1660

85

110

135

160

185

O U T PERFO RMN O T RA T ED


15 Septem

ber 2016

3-Year Price and Rating History for PepsiCo, Inc. (PEP.N)

PEP.N Closing Price Target Price Date (US$) (US$) Rating 20-Sep-13 81.74 87.00 N 13-Feb-14 79.69 85.00 23-Jul-14 90.82 92.00 09-Oct-14 93.57 95.00 11-Feb-15 100.40 105.00 15-May-15 98.22 NR * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price PEP.N

1- Jan- 14 1- Jan- 15 1- Jan- 1670

80

90

100

110

N EU T RA LN O T RA T ED

3-Year Price and Rating History for The Coca-Cola Company (KO.N)

KO.N Closing Price Target Price Date (US$) (US$) Rating 20-Sep-13 39.40 48.00 O 18-Feb-14 37.47 46.00 10-Feb-15 42.40 48.00 14-May-15 41.50 NR * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price KO.N

1- Jan- 14 1- Jan- 15 1- Jan- 1635

40

45

50

O U T PERFO RMN O T RA T ED

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activitiesAs of December 10, 2012 Analysts’ stock rating are defined as follows:Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time.Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.


15 Septem

ber 2016

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings DistributionRating Versus universe (%) Of which banking clients (%)Outperform/Buy* 53% (50% banking clients)Neutral/Hold* 29% (24% banking clients)Underperform/Sell* 18% (44% banking clients)Restricted 0%*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.htmlCredit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Target Price and RatingValuation Methodology and Risks: (12 months) for The Coca-Cola Company (KO.N)

Method: Our $44 target price for KO assumes a 23x P/E multiple on our discounted CY18 EPS estimate, supported by our SOTP valuation. This represents a premium to its closest peers which we think this is justified by Coke's relative strength internationally, its clear CSD leadership, and the new asset-light model. We assign a Neutral rating because we think the risk-reward is balanced.

Risk: Risk factors that could impede achievement of our $44 target price and cause us to lower our Neutral rating include 1) increased regulation of the CSD category or sugary food / beverage products in general, 2) continued declines of the CSD category, and 3) executional issues related to the refranchising.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (KO.N, DPS.N, PEP.N, MNST.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.Credit Suisse provided investment banking services to the subject company (KO.N, DPS.N) within the past 12 months.Credit Suisse has managed or co-managed a public offering of securities for the subject company (KO.N, DPS.N) within the past 12 months.Credit Suisse has received investment banking related compensation from the subject company (KO.N, DPS.N) within the past 12 monthsCredit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (KO.N, DPS.N, PEP.N, MNST.OQ) within the next 3 months.As of the date of this report, Credit Suisse makes a market in the following subject companies (KO.N, DPS.N, PEP.N, MNST.OQ).Credit Suisse has a material conflict of interest with the subject company (PEP.N) . Laurent Grandet was formerly employed by Pepsico Inc. within the past 12 months and received compensation from the company during that period.For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=246290&v=-1cc3lxvq51wxcbb678gebplcg . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events.Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html.Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (KO.N, DPS.N) within the past 3 years.Principal is not guaranteed in the case of equities because equity prices are variable.Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.This research report is authored by:Credit Suisse Securities (USA) LLC............................................................................................................Laurent Grandet ; Clay Crumbliss, CFA

https://rave.credit-suisse.com/disclosures/view/report?i=246290&v=-1cc3lxvq51wxcbb678gebplcg

https://rave.credit-suisse.com/disclosures/view/report?i=246290&v=-1cc3lxvq51wxcbb678gebplcg


15 Septem

ber 2016

Important Credit Suisse HOLT Disclosures With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report.The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur.Additional information about the Credit Suisse HOLT methodology is available on request.The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur.CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse.For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.


15 Septem

ber 2016

This report is produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who-we-are This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates.The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk.

This report is issued and distributed in European Union (except Switzerland): by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Germany: Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). United States and Canada: Credit Suisse Securities (USA) LLC; Switzerland: Credit Suisse AG; Brazil: Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; Mexico: Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); Japan: by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau ( Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; Hong Kong: Credit Suisse (Hong Kong) Limited; Australia: Credit Suisse Equities (Australia) Limited; Thailand: Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok10500, Thailand, Tel. +66 2614 6000; Malaysia: Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch; India: Credit Suisse Securities (India) Private Limited (CIN no.U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India as Research Analyst (registration no. INH 000001030) and as Stock Broker (registration no. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777; South Korea: Credit Suisse Securities (Europe) Limited, Seoul Branch; Taiwan: Credit Suisse AG Taipei Securities Branch; Indonesia: PT Credit Suisse Securities Indonesia; Philippines: Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Additional Regional DisclaimersHong Kong: Credit Suisse (Hong Kong) Limited ("CSHK") is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an Australian financial services licence (AFSL) and is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (the Act) under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Act). Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Malaysia: Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. Singapore: This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. UAE: This information is being distributed by Credit Suisse AG (DIFC Branch), duly licensed and regulated by the Dubai Financial Services Authority (“DFSA”). Related financial services or products are only made available to Professional Clients or Market Counterparties, as defined by the DFSA, and are not intended for any other persons. Credit Suisse AG (DIFC Branch) is located on Level 9 East, The Gate Building, DIFC, Dubai, United Arab Emirates. EU: This report has been produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-US customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. US customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the US. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials,management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2016 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

https://www.credit-suisse.com/who-we-are

the coca-cola company soft drinks - credit suisse

Documents