Stock Analysis & Ideas

The Fizz is Flat in Coca-Cola

The fizz in Coca-Cola (KO) stock is flat, and I am neutral on the company.

3 Reasons the Fizz Is Gone

First, the consensus among analysts is a Moderate Buy. Five recommend buying shares, and three recommend holding if you own them. The average price target at $61.50 implies an upside of 11.3% from current levels.

Second, KO’s current share price is high. It is a bubble-away from the 52-week high of $57.56. The current price is just 8.1% under the five-year price high of $60.13 hit on the eve of the pandemic outbreak. (See Analysts’ Top Stocks on TipRanks)

The third reason to be cautious is economists’ frustration unsaddling the tenacious web enmeshing the global supply chain. KO is hampered by labor problems, trucking hardships, and higher commodity costs. All affect predictions about revenue and earnings.

For instance, Coke’s bottling operation in the U.K. reports “a lack of availability of Diet Coke and Coke Zero.” Aluminum cans are in short supply. Coke and related drinks are facing challenges in 29 countries across Europe.

The competition for aluminum cans directly affects Diet Coke availability. Cans are increasingly popular among hard seltzer and beer brewers. The “One Brand” global marketing packaging strategy of Coca-Cola created a singular visual identity system. Coca-Cola Red is its unifying trademark design. Customers will not accept Coke in glass growlers and Capri-Sun style pouches.

The company must contend with higher taxes on sugared beverages and multi-national income tax proposals. Sustainability advocates are increasingly successful in demanding solutions to the waste problems created by glass and plastic bottles, water scarcity, and competition.

There’s Pop Left in Coke

Advocates make convincing arguments for buying KO shares. The CEO downplays the problems, calling them “sporadic shortages” and “snarls in the supply chain.” He argues issues are of “diminishing magnitude” to KO.

The company’s financial performance consistently outshines analysts beating EPS estimates quarter-after-quarter. The dividend has increased over 59 consecutive years with an average payout of 70.9%. KO’s PE ratio of 27.7 is in line with that of its competitors, though slightly lower than Dr. Pepper (KDP) while higher than Nestle (NSRGY).  

Four indicators support the notion there’s plenty of pop left KO. Its financial technicals are positive. Momentum is positive. LTM ROE assets is 9.4%, a slight increase from 8.9% in Fiscal Year 2020, and the shares have a short interest of 0.82%. The company’s pricing power will get through periods of inflation and may enhance earnings.

Coke’s debt dropped around $7 billion by mid-Fiscal Year 2021. Debt is manageable because cash and equivalents on hand and annual cash flow are healthy. Against a $238.9-billion market cap, the company is financially risk-free.

Coke products are omnipresent across the globe. Fiscal Year 2020 revenue topped $33 billion thanks to its marketing and distribution strategies. They are so effective that Melinda Gates once pondered in a Ted Talk how Coke’s reach into the most remote villages “is kind of staggering.”

Her goal is to deliver condoms and vaccines with the same reach as the Coca-Cola model delivers. Coke “takes real-time data and immediately feeds it back into the product. They tap into local entrepreneurial talent, and they do incredible marketing.”

Another reason for bullishness about Coke is management. Its strategy is growth through acquisition. It is home to over 3,500 beverages and 5,000 brands. Management is on top of the trend for healthy drinks and hearty sports drinks. This month, Coca-Cola announced the $5.6-billion acquisition of sports drink maker Bodyarmor.

The Takeaway

KO is secure, if not sparkling. It is safe to park cash and collect a reasonable dividend. Coke will continue growing in revenue. Its market power will keep the supply chain and other extrinsic barriers at bay.

Inflation and a market crash are devilries about which investors need not worry. There seems little fizz in the offing to spark a pop of the stock price.

Brand identity, diversification, acquisitions, and global reach will continue growing this behemoth. With KO, it is all about patience.  

Disclosure: At the time of publication, Harold Goldmeier did not have a position in any of the securities mentioned in this article

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