Shares of Coca-Cola Europacific Partners (NASDAQ:CCEP) have enjoyed a good spell since my last update on the firm, significantly outperforming the broader global staples space (KXI) with a circa 30% total return in that time.

Being able to lean on the strength of Coca-Cola Company (KO) brands formed a plank of my 'Buy' rating back then, and results in the meantime have largely supported this, with CCEP continuing to deliver robust performance on both volume and price. High profile sporting events in CCEP's core European markets can help sustain this in the near-term, while closing on the acquisition of Coca-Cola Beverages Philippines boosts the company's longer-term growth potential.

While I have few complaints with CCEP's operational performance and prospects, the current $72.79 quote means these shares have already hit the two-year total returns price I set out last time. With the prevailing quote requiring more aggressive modeling vis-a-vis management's growth algorithm to justify, I don't see the upside here that I did last year. I downgrade the stock to 'Hold' as a result.

Sales Remain Robust, With Philippines Boosting Longer-Term Prospects

CCEP is the largest Coca-Cola bottler by revenue, and with the top line skewing heavily to mature European markets, organic growth is not something you would imagine is in plentiful supply here.

That said, CCEP has hit a purple patch lately, with sales growth running ahead of management's growth algorithm just as an interesting mix of near and longer-term growth drivers appear on the horizon.

Taking those points individually, I laid out last time how CCEP can lean on the brand strength and pricing power of TCCC's collection of brands. This continues to sustain robust revenue growth, with first quarter sales up 5.3% on an adjusted comparable currency-neutral basis. This was just over a point ahead of management's medium-term target of 4% annualized revenue growth. Growth continues to be fairly balanced, with around 2 points of that figure coming from volume and the rest from price/mix.

CCEP's top line skews over 70% to mature Western and Northern European markets with the remainder coming from Asia Pacific. While the latter also includes mature markets like Australia (~12% of sales), it also captures all of CCEP's emerging market exposure in Indonesia and the Philippines. With that, first quarter trends are broadly what investors should expect to see over longer horizons, with European comparable revenue growth of 4% leaning more on pricing (+5.6%) compared to API (up just 0.2% versus 8.3% comparable sales growth), where I expect CCEP to prioritize volume as it builds brand equity in its two key emerging markets.

While I usually think on slightly longer timescales than quarter-to-quarter, I would note that both the European Football Championship (Germany) and 2024 Olympics (France) are both taking place in CCEP markets this summer. The away-from-home channel (that is bars, pubs, restaurants and so on) isn't as large a slice of CCEP's business in these countries compared to the group average (around 30% in France and Germany versus around 50% overall), but an events-driven boost here would nonetheless help keep sales growth buoyant in Q2 and Q3.

Most investors will rightly care more about longer-term growth prospects. Positively, there are solid reasons for optimism here too. I mentioned last time the acquisition of Coca-Cola Beverages Philippines ("CCBPI") as being one of those, and that deal has indeed closed in the intervening period.

Between strong GDP growth (mid single-digits in 2024 and 2025), relatively low per-capita non-alcoholic ready-to-drink beverage consumption (around 0.5x the level of Great Britain, CCEP's largest market) and better demographics, the Philippines offers much stronger organic growth potential than CCEP's core developed markets. It also meaningfully increases the company's overall emerging market exposure, with the Philippines and Indonesia now around 12% of group revenue versus just 3% for Indonesia previously.

Valuation Now Looking Full

While I have very few complaints with CCEP at the business level, that doesn't necessarily make for a compelling investment case. These shares have returned over 30% since my last update nine months ago, while 2024 earnings will likely advance around 12% on 2023 (largely due to the inclusion of CCBPI earnings this year).

Management's medium-term growth algorithm is fairly straightforward: grow comparable sales at a circa 4% annualized clip and leverage this into high single-digit annualized EBIT growth, aided by a €350-400 million cost savings program over the 2024-2028 period. That implies EBIT margins of over 14% by the end of that period, with comparable return on invested capital ("ROIC") seen advancing 50bps per annum. For reference, comparable ROIC was 10.3% in 2023.

Earnings growth beyond that is going to prove more challenging. Sales still skew heavily to mature markets, and with a relatively large portfolio tilt toward the low-growth sparkling category (~85%), this doesn't really allow for anything above low single-digit annualized growth in the long run.

Margins also face some longer-term challenges. Concentrate (from which CCEP makes end-products like Coca-Cola) and finished goods account for half of the company's cost of sales and around 36% of total operating costs. As concentrate is purchased from TCCC, the economics of CCEP's business are in large part determined by TCCC. While TCCC has good reasons not to push CCEP too hard on this, it will also leverage this relationship to capture most of the value from the overall Coca-Cola system. Given that, I don't see much longer-term upside to margins and ROIC beyond the levels implied by management's medium-term targets.

Last time out, I valued CCEP on a flat 15x multiple of then-consensus 2025 EPS, anticipating a further ~$4.35 per share in cumulative dividends given management's stated payout ratio of around 50% of earnings. Sticking with that gets me to a total returns price of around $74 in two years, leaving little upside from the prevailing quote of $72.79.

More fundamental valuation methods don't yield anything better. ROIC-driven EV/EBITDA gets me to a circa 10x multiple, with that based on a roughly 7.2% WACC, long-term ROIC of around 12% and long-term annualized growth in the 3-3.5% area. That would value the equity at around $60 per ADS based on 459 million shares outstanding, around 17.5% below the prevailing price.

A simple dividend discount model gets me to a similar place, with the 2023 payout likely to grow alongside earnings at high single-digits annualized over the medium term before fading down to the low single-digit area. Discounting that back at a 9% hurdle rate gets me to a fair value of a little under $60 per ADS.

Summing It Up

There is very little to grumble about with CCEP on an operational basis. Sales growth remains robust, with roughly equal contributions from volume and price, while the company sports an interesting mix of near and longer-term growth drivers now that the CCBPI deal has closed.

That said, these shares have gained over 30% in the nine months since prior coverage, and that has understandably changed the valuation picture here. With upside requiring more aggressive assumptions vis-a-vis management's medium-term targets and/or higher longer-term growth, CCEP no longer offers the total returns potential it did last year. As such, I downgrade the stock to 'Hold'.