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Coca-Cola Stock: Compelling, Even at New Highs
Stock Analysis & Ideas

Coca-Cola Stock: Compelling, Even at New Highs

Shares of Coca-Cola (KO) have been making new highs, as the broader markets have been sinking further into a correction.

As one of the most cherished consumer staples out there, it should come as no surprise to see Coke stock zig while the rest of the markets zag. It’s not just the defensive nature of the company that’s powering the rally, though. The company has done many things right, with intriguing new product offerings and a roadmap.

Elon Musk’s cheeky comment about buying Coca-Cola was met with a lot of laughter on Twitter (TWTR). Although clearly a joke, Musk’s words about “putting the cocaine back in” may have given shares of Coke a bit of rally fuel. This isn’t the first time Musk’s mention of a company has sent shares soaring higher. Call it the “Dogecoin” effect, if you will!

While KO stock will eventually run out of steam, I do view a lot of fundamental strength that’s supporting it. With a still modest 27.6 trailing earnings multiple, I am bullish on KO stock, especially in this choppy market environment.

Another Strong Quarter

In Q1 2022, Coke saw 18% in organic revenue growth. That’s extraordinary for a low-tech company not known for double-digit top-line growth. Though a chunk of the coronavirus headwinds has been alleviated, many headwinds remain, especially in China.

In any case, management is upbeat with its guidance, calling for 8%-10% EPS growth, alongside 7%-8% organic revenue growth.

Moving ahead, inflation could work its way into the numbers. With one of the most legendary brands out there, I expect it will have few issues passing on higher prices to customers.

A single-digit percentage increase in price is unlikely to have your average consumer opting to drink off-brand, generic cola, after all. It’s Coke’s strong brand and pricing power that makes it one of the stablest stocks in this market.

Coca-Cola’s New Product Categories

Caffeinated beverages (think energy drinks or ready-to-drink coffee) and healthier sparkling water are just two places where Coke could grow its margins, and reignite interest among younger consumers. A highly caffeinated product could give more than just its consumers a jolt. It could provide its marketing campaign one, too.

Coke may be perceived as a bland company by some. Still, it’s spending money in the right places to bring forth intriguing innovations within the beverage space.

The Coke Starlight flavor is the company’s first sparkling beverage category. It’s a limited-edition offering, but it’s been getting the attention of consumers in the shopping aisle. The Starlight flavor tastes like space, whatever that means. Its “Byte” flavor, which was inspired by video gaming, supposedly tastes like the Internet or something of the sort.

While such limited-time offerings are intriguing, nobody knows what their futures hold. By having the Byte flavor of Coca-Cola cater to gamers, I’d imagine a lot of younger consumers are craving a can to see what all the buzz is about.

Such new growth areas (limited-edition sparkling drinks) are a major wild card, given Coke has had mixed success with introducing new products. Still, there’s not much for the company to lose by giving them a shot on a limited-time basis.

Wall Street’s Take

According to TipRanks, KO stock comes in as a Moderate Buy. Out of 19 analyst ratings, there are 13 Buy recommendations, and six Hold recommendations.

The average Coca-Cola price target is $70, implying 5.8% upside potential. Analyst price targets range from a low of $60 per share to a high of $76 per share.

Bottom Line on Coca-Cola Stock

Coca-Cola does marketing like few others. With new pathways for growth in the ready-to-drink coffee and sparking beverage categories, KO stock rightfully deserves a premium multiple. Perhaps a margin-driving cannabis-infused beverage could lie in the distant future?

Add medium-term reopening momentum into the equation, and the stock’s safe-haven defensive nature into the equation, and Coca-Cola looks solid.

Sure, Coke stock has had a run and may be due for a breather at some point. However, it’s hard not to love the firm as it continues firing on all cylinders. Arguably, Coca-Cola hasn’t looked this attractive in a very long time, as value trumps growth.

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