Source: PaxForex Premium Analytics Portal, Fundamental Insight
Coca-Cola's recent stock returns and its business performance are diverging, presenting a notable contrast. Despite the beverage giant reporting positive operating trends for fiscal 2023, its stock performance places it among the weakest on the Dow Jones Industrial Average for the year. Over the last 12 months, Coke's shares have seen a modest 2% increase, significantly lagging behind the Dow's impressive 19% rally.
Given this performance gap, does it create an opportunity for investors to potentially achieve market-beating returns by investing in Coke stock today? Let's delve deeper into the analysis.
The primary concern affecting Coke's business is its subdued growth. While organic sales posted a 12% increase in 2023, building on a 16% surge in the previous year, the growth was primarily driven by higher prices. In contrast, Coke's sales volume growth decelerated from 5% in 2022 to a mere 2% last year. This slowdown in sales volume growth raises concerns about future sales trends, indicating a reduction in consumer demand for soda.
The anticipated soft momentum is likely to persist into 2024. Coke projects a further slowdown in organic sales growth for a second consecutive year, expecting gains to be in the range of 6% to 7% in 2024. Investors are optimistic about the company returning to double-digit expansion, encompassing both increased prices and higher sales volumes. However, in the interim, they may need to contend with market share growth in an industry facing sluggish conditions. Notably, rival PepsiCo is forecasting just a 4% increase in organic sales this year, reflecting the broader challenges in the industry.
Coca-Cola is maximizing its potential amid a slower growth profile, delivering excellent news for shareholders. In 2023, non-GAAP earnings experienced a robust 16% increase, attributed to a strategic blend of cost reductions, elevated prices, and heightened demand for non-core beverages like sparkling waters and energy drinks.
These achievements propelled the operating profit margin to an impressive 29% of sales, nearly doubling that of PepsiCo's results. CFO John Murphy, during a recent investor conference call, expressed optimism about further margin expansion in 2024.
Cash returns serve as another positive aspect of enhancing overall shareholder returns. In 2023, Coke generated approximately $10 billion in free cash flow, returning nearly the same amount to investors through stock buybacks and an increasing dividend. With a dividend payment track record spanning over 60 consecutive years, Coke boasts one of the lengthiest records in the market. While cash flow is expected to dip in 2024 due to one-time tax payment issues, the long-term outlook for Coke's cash trends remains highly positive, ensuring steady dividend growth in the years (and decades) to come.
Interestingly, Coke's stock is currently attractively priced. Despite its price-to-sales ratio being twice that of PepsiCo's comparable metric at 6, historical comparisons show that investors were willing to pay over 7 times sales for this business at various points in the past three years. The recent underperformance of the stock in the last 12 months mitigates the risk of overpaying for the company.
Investors need to weigh these positive aspects against the potential for softer sales trends in the short term. Although the stock may reflect this sluggishness, particularly through much of 2024, gaining exposure to one of the strongest consumer staples companies globally makes Coke a worthy addition to most investors' watch lists for 2024 and beyond.
As long as the price is above 58.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 60.18
- Take Profit 1: 62.00
- Take Profit 2: 64.00
Alternative scenario:
If the level of 58.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 58.00
- Take Profit 1: 57.00
- Take Profit 2: 55.00
