Georgia, Atlanta-based The Coca-Cola Company (KO) is a leading beverage company that manufactures, markets, and sells various nonalcoholic beverages worldwide. The company operates through a network of independent bottling partners, wholesalers, distributors, retailers, and bottling distribution operators. It has a market capitalization of $273.15 billion.
Due to the persistent macroeconomic and geopolitical headwinds, the stock market is expected to remain under immense pressure in the upcoming months. Yesterday, the Federal Reserve raised its benchmark interest rate by 75 basis points for the second consecutive month to tame multi-decade high inflation.
Moreover, we are on the brink of a recession. The economy contracted at a 0.9% annual rate in the second quarter after a 1.6% decline in the first quarter. This indicates that the economy is in a more vulnerable position.
Warren Buffett’s long-term value investing strategy serves as a guide for investors amid uncertain market conditions. He typically invests in companies that have stable businesses and are well-positioned to pay attractive dividends.
KO is the longest-held stock at Buffett’s Berkshire Hathaway (BRK.A) (BRK.B). It owns nearly 400 million shares of KO. The company represents around 8% of Berkshire’s portfolio.
The company reported impressive second-quarter results, demonstrating resilience in the marketplace amid the ongoing challenges. “Our results this quarter reflect the agility of our business, the strength of our streamlined portfolio of brands, and the actions we’ve taken to execute for growth in the face of challenges in the operating and macroeconomic environment,” said James Quincey, KO’s Chairman, and CEO.
Furthermore, the company is known for paying attractive dividends. KO pays $1.76 as dividends annually, which yields 2.79% on the current price. Its 4-year average dividend yield translates to 3.12%. Its dividends have increased at a CAGR of 2.87% over the past three years and 3.62% over the past five years. In addition, the company’s annual dividend has grown for 59 consecutive years.
KO’s shares have gained 6.3% in price year-to-date and 10% over the past year to close the last trading session at $63.01.
Here is what could influence KO’s performance in the upcoming months:
Solid Financials
KO's net operating revenues increased 11.8% year-over-year to $11.33 billion in the fiscal 2022 second quarter ended July 1, 2022. Its gross profit grew 2.4% from the year-ago value to $6.50 billion.
As of July 1, 2022, the company’s cash and cash equivalents came in at $8.98 billion, and its current assets stood at $23.14 billion. In addition, cash inflow from operating activities amounted to $4.55 billion.
Favorable Analyst Estimates
Analysts expect KO's revenue for the fiscal 2022 third quarter (ending September 2022) to come in at $10.52 billion, representing a rise of 7.9% from the same period in 2021. The $0.66 consensus EPS estimate for the ongoing quarter indicates a 1.5% year-over-year increase.
The company’s revenue and EPS for the current year (ending December 2022) are expected to grow 8.9% and 6% year-over-year, respectively. Also, Street expects the company's EPS to grow 6% per annum over the next five years. The company has surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive.
Higher-than-industry Profitability
KO’s trailing-12-month gross profit margin of 58.89% is 81% higher than the 32.53% industry average. Its trailing-12-month EBITDA margin of 31.99% is 153.9% higher than the 12.60% industry average. Likewise, the company’s trailing-12-month net income of 23.16% is 317.2% higher than the industry average of 5.55%.
Furthermore, KO’s trailing-12-month ROCE, ROTC, and ROTA of 42.30%, 11.16%, and 10.27% are higher than the industry averages of 12.61%, 6.43, and 4.87%, respectively.
POWR Ratings Show Promise
KO's overall B rating equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.
KO has a grade of A for Quality, consistent with its higher-than-industry profitability ratios. In addition, it has a B grade for Stability. The stock’s beta of 0.58 justifies the Stability grade.
KO is ranked #18 out of 35 stocks in the A-rated Beverages industry.
Beyond what I have stated above, we have also given KO grades for Sentiment, Growth, Value, and Momentum. Get access to all the KO ratings here.
Bottom Line
The recent macroeconomic and geopolitical headwinds have fostered immense stock market volatility. In the challenging economy, consumer staple stocks are considered safe havens due to the non-cyclical nature of their businesses. Warren Buffett’s Berkshire Hathaway owns over 400 million shares of the beverage company.
KO pays high-yield dividends and is well-positioned to stay resilient amid these uncertain times. Given the company’s robust financials, higher-than-industry profitability, and solid revenue and earnings growth estimates, we think it could be wise to buy the stock now.
How Does Coca-Cola Company (KO) Stack Up Against its Peers?
KO has an overall POWR Rating of B. One could also check out these other stocks within the A-rated Beverages industry with an A (Strong Buy) rating: Embotelladora Andina S.A. (AKO.B), Suntory Beverage & Food Ltd (STBFY), and Kirin Holdings Company, Limited (KNBWY).
KO shares were trading at $64.06 per share on Thursday afternoon, up $1.05 (+1.67%). Year-to-date, KO has gained 9.81%, versus a -13.87% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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