Coca-Cola: A Buy Ahead Of The Upcoming Earnings Release

Summary:

• The Coca-Cola Company has long been an investor favorite as proven by online traffic on some investment blogs.
• EBIT and EBITDA have been growing over the past three years, with only EBT declining in the 2021-22 financial year.
• KO’s EV/EBITDA is on the decline in recent years, indicating that this may just be the right time to buy some shares.
• The upcoming earnings release on April 25 (estimated) pushes us to recommend buying the stock now.

Background

The Coca-Cola Company (NYSE:KO) has been an appealing investment over the past years and in recent times has bounced back from the impacts of the Covid-19 pandemic. A look at the company’s stock chart shows that it has been on a clear uptrend over the decades gone by and the dividend payout history is very good indeed. Starting with this piece, we had published three articles already on Coca-Cola and it’s time to dive in again and revisit this value investor darling’s current state.

The Coca-Cola Company reported revenues of $10.13 billion in the last reported quarter, an increase of 7% YOY. Over the last four quarters, revenue estimates have been topped by the global beverage giant. In 2021, the YOY revenue gains was attributed to the volume growth, where a growth in the unit case volume was observed in almost all the operating segments and beverage types.

In addition to the strong brand recognition and a vast distribution network, we feel that the stock is positively driven by the spirits of investors. Lately, KO has been touted as one of the most watched stocks by Zacks.com visitors. It is evident that the company is well backed up by the market, with institutions actively buying the stock. Prices have been up and down, however, over the last year. The stock’s value has stayed the same during this one-year period. Analysts have rated KO stock mostly as a buy over the past few months and the average price target is $68.25.

Company Overview

The Coca Cola Company was founded in 1886 and is headquartered in Atlanta, Georgia. The current market cap of $256.1 billion makes it easily one of the safest investments out there. The company started trading on the NYSE back on September 5, 1919 at $40 per share. Over the many years, the stock has split 11 times. It may just be the greatest consumer stock to have been owned over the last century given the returns including dividends.

The business portfolio comprises over 200 types of beverages, sold in more than 200 countries targeting a wide range of age groups. Most revenue is generated in North America (34.1%), while Europe, Middle East and Africa (17%) and Latin America (10.7%) are also important revenue drivers.

The Vital Earnings Report

There is evidence that the stock price tends to fluctuate based on the earnings release. The Coca-Cola Company is scheduled to report earnings on April 25 and this is just over a month away. In the days leading up to the earnings report, there may not be much movement in the share price. So its best to look carefully at the way Coke is trading and buy the shares at the lowest point you can get over the next week.

As you will see in this article, the fundamentals of KO remain sound. Therefore even an earnings miss, which is highly unlikely given recent performance, could be an excellent opportunity to buy more of the stock. In the likelihood of an earnings beat or a match, the price may go up. So it would be better to buy now regardless.

A closer look at the dividends

Long term Coca-Cola shareholders have been rewarded with uninterrupted dividends since 1893.

The beverage maker paid dividends of $7.3 billion and $7.6 billion during the years ended December 31, 2021 and 2022 respectively. The annualized common stock dividend was $1.68 per share and $1.76 per share in 2021 and 2022, respectively, increasing to a value of an estimated $1.84 per share (annual) in 2023. This is the 61^st consecutive annual increase.

It can be safe to say that investors can rely on Coca-Cola’s close-to-constant dividends for the next 20 years as well. The dividend history, specifically since 1963, is what makes investors buy shares of Coke.

Moving past the dividends

In this article, we move on to analyzing certain fundamentals of this stock. We use the outputs of three different figures, namely EBT, EBIT and EBITDA to analyze the profitability of investment in the Coca-Cola Company.

Looking at EBT gives an investor a good idea of the company’s ability to generate earnings as opposed to exploring net income alone. In the case of Coca-Cola, debt is necessary for its long-term growth like so many other public companies. EBIT will give a decent sense for the earnings potential and operating performance of the company, so analyzing it will be essential. Cash flow is the lifeblood and EBITDA does a good job in being an indicator for this.

The table below has all three figures for Coke and their values over the past three years.

USD in millions	2020	2021	2022
Net income	7747	9771	9542
Earnings before tax (EBT)	9749	12425	11686
Earnings before interest and tax (EBIT)	9770	11109	12345
Earnings before interest and tax, depreciation, and amortization (EBITDA)	11306	12561	13605

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Source: MarketScreener

The EBITDA of Coca-Cola has risen steadily since 2020. EBIT has shown a similar trend. It is only EBT that has declined between 2021 and 2022. Increasing EBIT and EBITDA is something that businesses aspire to do and in KO’s case the numbers speak for themselves. While these metrics have their limitations, it signifies that Coca-Cola is doing well operationally and continuously improving its profitability. Consequently, we believe these fundamentals keep the company attractive.

The margins are something we haven’t explored in this article, but we wish to mention that they will boost the company’s topline going forward as stated by some analysts. The company’s trailing-12-month EBITDA margin is an impressive 31.42%, which is 169.9% higher than the industry average of 11.64%.

Let us now look at EV/EBITDA, something that we analyzed in our first article on this platform.

This value is just listed in the table below and it was obtained from MarketScreener.com, where it is available free of charge. We also thought of listing the respective years’ share price and shares outstanding as it might be important in the analysis of the stock.

	2020	2021	2022
Share price	54.8	59.2	63.6
No of shares of common stock outstanding (in thousands)	4297435	431942	4324513
Enterprise value (USD in millions)	267550	285889	275082

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The ratio of EV/EBITDA compares the entire value of the business to the amount of EBITDA earned annually. This ratio offers investors the chance to see how many times the EBITDA they should pay to acquire the entire business.

	2020	2021	2022
EV Value	267550	285889	275082
EBITDA Value	11306	12561	13605
EV/EBITDA	23.7x	22.8x	20.2x

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The EV/EBITDA value has been on the decline, which is nice to see.

Current values of EV/EBTIDA

Coca-Cola Company	20.64
Benchmark competitors
PepsiCo Inc.	18.56
Philip Morris International	14.21
Benchmark sector
Food, Beverage, and Tobacco	17.83

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The EV/EBITDA values of Coca-Cola Company is higher than the benchmarks with respect to competitors and the industry. Consequently, the company is relatively overvalued going by this vital metric. PepsiCo Inc. (PEP) and Philip Morris International (PM) are fairly undervalued in this case.

So should investors buy more of Coca-Cola Company shares at this time? We presume it might be best to wait a little more and see how the stock performs in the next couple of days. You don’t want to get burned by entering at the wrong price.

This brings us to the risks section.

Risks

The soda giant has reportedly seen its revenue slide over the past decade, although there has been a rebound in recent years. The biggest issue facing the global bottler is that Americans have become more concerned about calories and additives in their drinks. Coke is something that is seen as cheap and this could be another concern. It is true that the earnings power of consumers has increased a lot faster than the price of a serving of Coca-Cola. This can be a risk, but not in the case of Coca-Cola apparently as the servings enjoyed each day keeps soaring. What is more, recent price increases have led to bigger profitability numbers. This brings us to our next risk which is how can a beast like Coke continue to grow. Does Coca-Cola have room left to run? This is the biggest concern for us given that the company already has a massive global presence. However, the organization has continued to defy naysayers and keeps looking attractive for prospective shareholders.

In terms of financial performance, one of the things we wish to point out is that the company’s gross profit margin decreased to 58.1% in 2022, slightly lower than the 60.3% in the previous year. Across the board, profitability ratios have fallen albeit slightly. This was mainly due to the adverse impacts of foreign currency, exchange rate fluctuations and increased commodity and transportation costs, which may continue in the coming year as well. These three factors pose the major risks for this stock.

Our Recommendations ahead of the upcoming Earnings Report

Coca-Cola is expected to post earnings of $0.64 per share, which means there will be no change from the year-ago quarter. The consensus earnings estimate for the fiscal year represents an increase, though. KO’s earnings are expected to grow from $2.60 per share to $2.79 per share in FY 2023, which signifies a 7.31% gain. We feel these forecasts may propel the stock up in the coming weeks. Additionally, revenue growth is predicted. The company has been topping consensus revenue estimates over the past year.

In all likelihood, there should be another dividend increase. If you go by the commentary prior to the release of the last earnings report, Coca Cola looks appealing once again. There is steady growth in the business and it is satisfying most fundamental values. The topline growth expected should benefit the operating margin as was seen in the last earnings release.

The company looks in good shape to have another good quarter. The price target by analysts keeps rising. Institutions hold 72.22% of the stock and might add to their positions if the dividend and distribution outlook continues to be positive. With all that KO stock has going for it, we recommend buying it at current prices.

Conclusion – Investors love it, you would too

The Coca-Cola Company is a high quality dividend stock and a great investment to consider for all types of investors with steady and increasing top-line growth predicted. The company has had an uninterrupted dividend since 1893 reportedly, however one can argue that it is doubtful whether it might keep up the increases in payouts after examining certain fundamentals. Dividend investors do have better options out there going forward.

Looking at the bigger picture and moving past the dividends, the EV/EBITDA value of Coca-Cola has kept declining and reached the value of 20, which indicates a cheaper valuation, and this might be enough proof for investors to reap the benefits of this iconic firm in the consumer industry by buying into it.

While there has been bad publicity about packaged drinks in general, the original refreshing taste of a bottle or can of Coke make it hard to compete with especially at the low price it is offered at. Additionally, while return on sales ratios have fallen over the past financial year, it must be mentioned that they are much higher than the nearest competitors’ values and the industry as a whole.

The company’s focus on expanding its product portfolio, investing in marketing campaigns and digital transformation is expected to drive growth in the future. Additionally, the company’s focus on sustainability – a theme across public companies as of late – could resonate with consumers and drive sales growth. Therefore, we believe that Coca Cola company is a solid investment opportunity for investors especially over the long-term horizon.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in KO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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