Coca-Cola Stock: Is Now The Time To Buy As It Nears All-Time High? (NYSE:KO) (2024)

World War II. Well over a half century has come and gone since victory was won over the Axis powers. Perhaps nothing better illustrates the disruptions caused by COVID-19 than the fact that in 2020, The Coca-Cola Company (NYSE:KO) recorded the largest annual decline in the volume of beverages sold since 1946.

While co*ke is the largest producer of non-alcoholic beverages, roughly half of the company’s overall sales rely on public venues. With coronavirus closures and restrictions of restaurants, sports stadiums, and movie theaters, co*ke’s sales fared badly.

However, in 2021, the company’s fortunes rebounded. When the last quarter’s results were made public, management revealed it sold more “away from home” products in the fourth quarter than it did in Q419, the first time that’s occurred since COVID struck.

Moreover, co*ke has seen growth in practically every relevant profit metric since James Quincey became the company’s CEO.

A Glance At The Last Earnings Report

co*ke reported Q421 earnings on the tenth of February. The company beat analysts’ consensus with EPS of $0.45 versus expectations of $0.41 and revenue of $9.46 billion, as opposed to the $8.96 billion forecast.

The revenue beat came despite there being six fewer days in this quarter.

Net income for Q421 hit $2.41 billion, well above the $1.46 billion reported in Q420.

Organic revenue and case volume both increased by 9%. co*ke Zero Sugar saw strong sales, providing double-digit growth. So too did the nutrition, juice, dairy and plant-based beverages which reported an 11% volume increase.

The company tallied a 12% sales increase in sports, coffee and tea beverages.

For the full year, net revenues increased 17% to $38.7 billion.

co*ke increased pricing by 10% in Q4 and 6% in FY21. Even so, the non-GAAP operating margin fell from 27.3% a year ago to 22.1%.

Management guides for organic revenue growth of 7% to 8% for FY22; however, due to currency headwinds and changes in taxation, the company expects comparable EPS growth of 5% to 6%.

Why Has Coca-Cola Stock Been Rising?

Late last year, KO acquired sports drink purveyor BodyArmor for $5.6 billion. Combined with Powerade and its lesser known (at least in the US) beverage Aquarius, the addition of BodyArmor is designed to strengthen co*ke’s competitive position against PepsiCo’s (PEP) Gatorade.

Gatorade is the leader in the sports drink category by a wide margin. However, that lead is shrinking. As recently as the first quarter of 2020, Gatorade commanded 72% of the sports drink market. co*ke and BodyArmor have been chipping away at Pepsi’s position, and Gatorade now holds 68% of the market share.

As of early February, sales of BodyArmor had increased by over 43% year-to-date. Wells Fargo predicts the acquisition will be accretive to FY22 EPS by $0.06 or 2.4%.

The acquisition of BodyArmor highlights co*ke’s transition away from a company focused on carbonated beverages to a firm with a broader array of products. When current CEO James Quincey took KO’s reins back in 2017, he emphasized the need to become a total beverage company. co*ke had experienced declining revenues for six years running, as consumers shifted away from sugary drinks.

An example of the malaise that seized the company is the fact that Classic co*ke sales plummeted 22% in the last decade.

Quincey noted over half of co*ke’s 400 master brands are sold in one country and combined account for only 2% of total revenue. This led to the decision to eliminate 200 unproductive products in 2020.

We are shifting to prioritizing fewer but bigger and stronger brands across various consumer needs. At the same time, we need to do a better job nurturing and growing smaller, more enduring propositions and exiting ‘zombie’ brands’... We believe the best way forward is to be more choiceful and target bigger, more scalable bets and be disciplined in our experimentation.

James Quincey, CEO

Meanwhile, co*ke’s net income and operating income have rebounded. Net income recently topped $9 billion for the first time since 2012, while operating income grew to over $11.3 billion. Contrast that with the KO’s average annual operating income since 2013, of about $10.1 billion.

Free cash flow has more than doubled since Quincey took charge. In 2017, FCF was $1.24 a share. FCF topped $2.00 a share for the first time in 2020, and hit $2.61 a share in 2021.

In large part, the company’s strong performance during Q4 is related to a revival of sales in away-from-home products. Roughly half of the company’s sales stem from those names, and beverages sold in locales like restaurants, movie theaters, and sports venues also command higher prices.

Count Guggenheim Securities analyst Laurent Grandet among those that view the lifting of COVID restrictions as a catalyst for co*ke:

Barring new more lethal COVID variants, we expect on-premise to be back to almost pre-COVID levels by summer ’22, which is about 6 months earlier than what we were assuming a year ago.

Recent News Of Note

co*ke’s management noted potential headwinds related to inflation during the most recent earnings report. However, analysts covering the company generally view co*ke as well suited for investors concerned with inflation. Analyst Sean King of UBS touts co*ke as a panacea of sorts when considering pricing pressures.

We believe KO's unique pricing and franchise model could enable it to realize a greater increase in profit per concentrate gallon than the fully burdened increase in costs associated with selling that gallon, including the marketing support and territory exclusivity embedded in that price to bottlers.

Analysts at JPMorgan also view co*ke as a means to KO inflation:

Regarding KO, about half of its global volumes are derived from the away-from-home channel; the increased vaccination levels, strong brand equity and better profitability of on-premise sales vs. at-home should accelerate earnings momentum, not only from a volume standpoint but because of better pricing and margins.

A bit over a month before the company released Q4 results, co*ke and Constellation Brands (STZ) entered into an agreement to have the latter company manufacture, market and distribute Coca-Cola's FRESCA Mixed, a new line of ready-to-drink co*cktails, in the US.

Research from Constellation Brands projects the adult alternative beverage market, including ready-to-drink co*cktails, at $8 billion. The company forecasts a CAGR of 15-17% for that market over the next three years.

Shortly thereafter, Molson Coors (TAP) and co*ke revealed an exclusive arrangement to develop and commercialize a brand of full-flavor alcoholic beverages inspired by the Simply juice brand.

About a week later, co*ke announced it was working towards an IPO for its African bottler business. KO has a 66.5% interest in Coca-Cola Beverages Africa, which it values at $8 billion.

A Forgotten Flaw In co*ke’s Investment Thesis

In late 2015, the IRS notified The Coca-Cola Company that it owed $3.3 billion in federal taxes, as well as interest, for 2007 through 2009. The case has been winding its way through the courts since, and is now forgotten by many investors.

The case centered on how Coca-Cola shifted profits to various foreign affiliates. Last November, the U.S. Tax Court ruled Coca-Cola allocated too much profit to its foreign operations. The Court’s decision upheld two IRS adjustments. However, it also found that Coca-Cola’s offset treatment related to dividends paid by foreign manufacturing affiliates to satisfy royalty obligations was lawful. Consequently, the most likely outcome is that KO’s tax liability will be reduced by $1.8 billion.

Even so, management recently warned the company could face a tax liability of as much as $12 billion, in a worst case scenario.

Coca-Cola: Debt, Dividend And Valuation

KO’s debt is rated in the single A’s by the major credit agencies.

Coca-Cola has a current yield of 2.93%. The payout ratio is a bit above 72%, and the 5-year dividend growth rate is 3.66%.

KO currently trades for $60.40 per share. The average one year price target of 14 analysts rating the company is $65.53. The average price target of the nine analysts that rated the company following the most recent earnings release is $66.00.

co*ke has a forward P/E of 24.63x, very near its 5-year average P/E of 24.37x. The company’s 5-year PEG is 2.74x.

Is KO Stock A Buy, Sell, or Hold?

For a company with a business model that is relatively simple to understand, co*ke has a somewhat convoluted investment thesis.

On one hand, you have a company that dominates its industry: KO has over twenty brands that generate a billion or more in annual sales, and five of those are ranked among the top ten beverages. With the exception of Korea and Cuba, co*ke sells its drinks worldwide.

There are some that would claim that the ubiquity of its beverages undermines its growth prospects; however, Coca-Cola's volume share is 13% in developed countries and 5% in developing nations, leaving ample room for expansion of its product lines.

On the other hand, since co*ke expanded beyond carbonated beverages, the firm’s returns on invested capital have declined to around 13%, down from a 30% return on invested capital it once routinely posted.

Consumers' tendency to increasingly shun sugary sodas has also contributed to the stock's underperformance. KO lagged the S&P 500 index over the past decade by a wide margin. Not including dividends, Coca-Cola is up about 64% in that time frame as opposed to a 216% increase for the index.

This leads me to what I view as the most important factor when I contemplate a prospective investment: where does the stock stand in terms of valuation.

With a P/E of nearly 25x, and a 5-year PEG of 2.74x, I find myself comparing the stock to names with strong growth prospects.

For example, I contemplate Alphabet (GOOG) (GOOGL) with a forward P/E, about a point below that of KO, and a 5-year PEG ratio that is less than half that of co*ke’s, and I must ask myself if the dividend payment I would receive from co*ke offsets the growth I’m likely to receive from Google.

As a dividend growth investor, I look at a company like Home Depot (HD). HD has a five year dividend growth rate of nearly 20%, and ask if I would be best opting for that stock to add a hefty yield to my portfolio versus an investment in KO.

Yes, Coca-Cola is a strong company in every respect. Nevertheless, valuations, and dividend growth prospects point me towards other potential investments.

I rate KO as a HOLD.