Source: PaxForex Premium Analytics Portal, Fundamental Insight
Due to the significant challenges faced by the restaurant sector during the pandemic, Coca-Cola also experienced a decline in sales. However, this mature and dominant beverage company has accomplished a remarkable feat by achieving nine consecutive quarters of year-over-year revenue growth. Despite this achievement, the stock has experienced a decline of approximately 1% (as of the current moment) in the past 12 months, while the S&P 500 has seen an 8% increase.
With a current price-to-earnings ratio of 27, aligning with the average valuation of the past three years, investors may wonder if it is a prudent decision to invest in Coca-Cola at this time. Let's delve deeper into the situation surrounding this leading beverage stock.
As previously mentioned, Coca-Cola is currently experiencing strong momentum. In the most recent quarter (Q1 2023, which concluded on March 31), the company, known for its iconic Coca-Cola brand as well as other household names like Dasani, Powerade, and Simply Beverages, achieved impressive results. The company's revenue reached $11 billion, representing a 5% increase compared to the same period the previous year. Diluted earnings per share also saw significant growth, rising by 12% to $0.72. These figures surpassed the expectations of Wall Street analysts, which is always a positive development for shareholders. Additionally, Coca-Cola achieved an exceptional operating margin of nearly 31% during the quarter.
One notable trend working in favor of Coca-Cola is its ability to implement price increases. This strategy is not uncommon, as many businesses adopt such measures to offset rising expenses. Despite the company raising prices, global unit case volume witnessed a 3% increase. Furthermore, Coca-Cola's management emphasized its growth in the market for nonalcoholic ready-to-drink beverages.
Looking at the bigger picture, Coca-Cola's total addressable market (TAM) has doubled since 2017 and currently stands at an impressive $1.3 trillion. The acquisition of Costa Coffee for $4.9 billion in 2018 expanded the company's presence in the coffee industry, significantly contributing to the TAM expansion. Considering Coca-Cola's overall revenue of $43 billion in 2022, the company holds a mere 3% share of its perceived opportunity.
In the midst of an uncertain economic climate, Coca-Cola can be viewed as a reliable safety option. Should a recession occur in the near future, the company is expected to fare well since the demand for its beverage products is not significantly influenced by fluctuating trends. This perspective is reflected in the guidance provided by the leadership team. During the Q1 2023 earnings call, CFO John Murphy stated that they anticipate "organic revenue growth of 7% to 8% for the current year, primarily driven by price mix in the face of the ongoing inflationary environment." This outlook underscores the company's ability to navigate challenging economic conditions and capitalize on the current inflationary landscape.
Over the past decade, Coca-Cola shares have shown a modest increase of only 46% (as of May 22), significantly underperforming the S&P 500's 151% return. At first glance, this may discourage investors, particularly those who prefer to select individual stocks with the aim of outperforming the broader market index. The whole purpose of such selection is to identify winning investments that surpass the overall index performance.
However, the situation is not entirely negative. Coca-Cola has a long history of paying dividends, with a current yield of a healthy 3%. It is also worth noting that the company has consistently increased its annual dividend for an impressive 60 consecutive years. Few businesses can boast such an outstanding track record of dividend payouts.
Some investors may prioritize Coca-Cola's dependable and low-risk nature in their portfolios. The steadily growing dividends can also be beneficial. This may particularly appeal to those nearing retirement age who seek a stable foundational stock to enhance their portfolios. In this scenario, purchasing Coca-Cola shares would make sense. Furthermore, it is worth mentioning that Warren Buffett's Berkshire Hathaway owns approximately 9% of the outstanding shares, adding to the company's credibility and attractiveness as an investment.
Based on the belief that Coca-Cola shares are unlikely to outperform the market over a long-term horizon, we currently have no intention of investing in Coca-Cola stock. The decision to avoid the stock appears straightforward to me, and we suspect it may be the same for other investors who prioritize growth opportunities.
As long as the price is above 59.00, follow the recommendations below:
- Time frame: D1
- Recommendation:long position
- Entry point: 60.80
- Take Profit 1: 63.00
- Take Profit 2: 65.00
Alternative scenario:
If the level of 59.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 59.00
- Take Profit 1: 58.00
- Take Profit 2: 57.00
