Source: PaxForex Premium Analytics Portal, Fundamental Insight
Despite the broader market's surge in 2023, Coca-Cola shares have experienced a price decline. Currently trading close to the pre-pandemic level of around $60 per share, this weak performance suggests that Wall Street has modest expectations for sales and earnings growth in the near term, particularly if consumer spending slows down and a recession looms. However, even amidst these conditions, Coca-Cola holds the potential to deliver impressive returns over the long run.
Taking into consideration the larger perspective, there are compelling reasons why Coca-Cola's stock appears to be an excellent long-term investment opportunity at present.
Coke's most recent earnings report provided little reason for investors to be concerned about its sales performance. Unlike its competitors, such as PepsiCo, which relied solely on price hikes to drive revenue growth, Coke achieved both increased volume and higher prices until late March. As a result, the company experienced a remarkable 12% surge in organic sales. In a press release issued in late April, CEO James Quincey expressed confidence in the company's strong system alignment, stating, "Our alignment within the organization has never been better."Coke's extensive distribution and marketing network have played a crucial role in driving sales growth for its core brands, even as the company expands into high-growth segments like coffee, sports drinks, and water. With its global presence, Coke has been able to offset weaker volumes in certain regions by achieving significant gains in other markets. This diversified approach is expected to safeguard investors' returns, regardless of the prevailing market conditions in late 2023.
The company's robust profit margin demonstrates its ability to set prices effectively, supported by unique competitive advantages. In the first quarter, operating income surged by 15%, accounting for fluctuations in currency exchange rates, as consumers continued to spend on on-the-go consumption. This success translated into a slight increase in the operating margin, rising to 32% of sales compared to 31% from the previous year. In comparison, PepsiCo typically converts around 13% of its revenue into operating profit.
Coca-Cola's strong cash flow performance aligns with its impressive track record of increasing dividends for 60 consecutive years. With $8 billion in dividend payments to shareholders last year and the capacity to potentially increase that amount this year, the company's cash flow outlook remains robust. Management aims to achieve nearly $10 billion of free cash flow in 2023.
Despite these positive operational and financial indicators, Coca-Cola's stock is currently valued at only 6 times annual sales, which is close to its lowest valuation since the initial stages of the pandemic. Cautious investors may find PepsiCo more appealing, as the snack and beverage giant is priced below 3 times sales.
However, Coca-Cola's premium valuation is justified due to its higher profitability, larger market presence, and growth opportunities in segments such as sparkling waters and energy drinks. Additionally, the company offers a dividend yield of over 3% annually, making it an attractive option for long-term returns.
While there is a possibility of further decline in Coca-Cola's stock in the coming months, investors should not be deterred from owning an excellent business. Over time, Coca-Cola is likely to generate significantly higher annual earnings, which will be the primary driver of shareholder returns in the long run.
As long as the price is above 60.00, follow the recommendations below:
- Time frame: D1
- Recommendation:long position
- Entry point: 60.30
- Take Profit 1: 63.00
- Take Profit 2: 64.00
If the level of 60.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 60.00
- Take Profit 1: 59.00
- Take Profit 2: 58.00