Coca-Cola KO has been hit hard by the pandemic even as the likes of Walmart WMT, Target TGT, and other retailers thrive during the coronavirus economy. But the company’s outlook is trending in the right direction and investors might want to consider buying the beverage powerhouse on the dip with it set to release its Q3 FY20 financial results before the opening bell on Thursday, October 22.
Pandemic Problems & Solutions
Coca-Cola, unlike rival PepsiCo PEP, operates a portfolio almost entirely of beverages, and nearly half of its business comes from away-from-home venues. This includes bars, restaurants, movie theaters, and stadiums, which are clearly still struggling to return to normal, especially movie theaters and stadiums.
The company’s sales tumbled roughly 30% in the second quarter, with global unit case volume down 16%. Yet it still topped out Q2 earnings estimates. The struggles, even though they are out of KO’s control, have prompted it to further its restructuring efforts, as it shrinks its workforce. On top of that, Coca-Cola is reorganizing by cutting some smaller, underperforming brands around the world.
Coca-Cola was working on adapting its portfolio to changing consumer habits well before the coronavirus. KO’s portfolio now includes potential Starbucks SBUX rival Costa Coffee, investments in upstart Gatorade challenger BodyArmor, a Coke-branded energy drink, and more.
The Atlanta-headquartered firm bought Topo Chico in 2017 to help give it exposure to the growing seltzer craze, and it launched its own sparkling water brand AHA earlier this year. And Coca-Cola is set to roll out an alcoholic version of Topo Chico sparkling water, as it looks to capitalize on the booming market, alongside the likes of Boston Beer SAM and countless others.
Despite the negative impacts of the pandemic on its out-of-home business, Coca-Cola remains one of the world’s most valuable brands, alongside Nike NKE, McDonald’s MCD, Disney DIS, Apple AAPL, and other big names in tech. This is worth considering as an investor since most of the names on the list are economic bellwethers and are likely poised to grow for years to come, and some might experience big post-pandemic boosts.
Meanwhile, KO stock has outperformed the consumer staples market over the last five years, up 20% vs. 3%. This trend continued over the past three years, as the nearby chart showcases. More recently, KO stock is down around 9% in 2020. That said, its shares are up 7% in the last three months to outpace the S&P 500’s 5% climb. KO rests at roughly $50 per share at the moment, which puts its about 17% off its February highs of $60 a share.
Coca-Cola trades at around its year-long median at 25X forward 12-month earnings. And it trades at a slight premium against its peer group—which includes the likes of PEP and Keurig Dr Pepper KDP—as it has for the last several years.
Plus, KO’s 3.3% dividend yield blows away the S&P 500’s 1.6% average, the 30-year U.S. Treasury’s 1.5%, and PepsiCo’s 2.9%. For reference, the firm’s next dividend is payable on December 15 to shareowners of record as of Dec. 1.
Last quarter, company executives said that the worst of the pandemic’s impact was likely behind KO, and Pepsi topped Q3 estimates at the start of October. Zacks estimates call for KO’s adjusted third quarter earnings to fall 20% to $0.45 per share, on 12% lower sales. This would mark huge improvement from Q2’s 29% revenue decline.
Peeking further ahead, Coca-Cola’s fourth quarter sales are expected to dip just 4%, with adjusted earnings expected to slip 7%. The company is then projected to report double-digit growth in FY21, with both its bottom and top lines expected to nearly match fiscal 2019’s totals.
Coca-Cola is a Zacks Rank #3 (Hold) at the moment that still faces uncertainty given the big impact that the virus continues to have on stadiums, concerts, restaurants, and more.
However, investors with longer-term horizons might want to consider adding the global beverage powerhouse that’s adapting to changing consumer habits. Let’s also remember that its dividend yield more than doubles the S&P 500 average and KO rests 17% off its highs.
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NIKE, Inc. (NKE) : Free Stock Analysis Report
Target Corporation (TGT) : Free Stock Analysis Report
Apple Inc. (AAPL) : Free Stock Analysis Report
Walmart Inc. (WMT) : Free Stock Analysis Report
Starbucks Corporation (SBUX) : Free Stock Analysis Report
McDonalds Corporation (MCD) : Free Stock Analysis Report
The Walt Disney Company (DIS) : Free Stock Analysis Report
CocaCola Company The (KO) : Free Stock Analysis Report
PepsiCo, Inc. (PEP) : Free Stock Analysis Report
The Boston Beer Company, Inc. (SAM) : Free Stock Analysis Report
Keurig Dr Pepper, Inc (KDP) : Free Stock Analysis Report
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