Coca-Cola: Q3 Earnings Rock, But Stock Remains A Hold

Summary:

• Coca-Cola beats on EPS and Revenue, Raises Outlook.
• Stock’s Q2 underperformance has brought valuation down, but it is still a hold here.
• Stock appears fully valued. Dividend pedigree, pricing power, and stability make the stock a strong hold.

Coca-Cola (NYSE:KO) has just reported its Q3 results as Seeking Alpha has covered here. Coca-Cola seems to have delivered the classic “beat and raise” report where EPS, Revenue, Organic Sales all came above estimates. As a result of continuing strength, the company has raised its revenue outlook.

We have a history of reviewing Coca-Cola’s earnings a can be seen here and here. Referencing past articles and using the same approach to cover the latest numbers not only holds the authors accountable but also leads to consistent Quarter-on-Quarter or Year-on-Year comparisons. Let’s take a look at some of the highlights from the recent earnings. Be warned that there are some great numbers here for longs.

• EPS of 69 cents beat by 5 cents. A company as predictable as Coca-Cola beating EPS by nearly 8% is rare.
• Revenue of $11.1 Billion beat by $600 Million, helped by Organic sales at 16% when the expectation was around 10%.
• Even more remarkable is the company’s revenue growth of 14% to 15%, despite currency related headwind. This growth percentage is consistent with the just reported EPS growth of 14%.
• Global Unit Case volume grew 4% with only Europe showing a slight 1% decline. Latin America, North America, and Asia Pacific grew by 5%, 1% and 9% respectively. The two most populous countries, India and China, contributed heavily to the strength in the Asian market. Unit case volume is often an underrated but important metric. It shows the strength (or weakness) of the product at the grassroot consumer level.
• If these numbers are not impressive enough, consider this. Coca-Cola has managed to gain market share in the nonalcoholic ready-to-drink (NARTD) category. Think about that. In this day and age, Coca-Cola is still gaining market share despite the increasing awareness of the side effects of Sugary drinks. Their diversification into non-sugary products is paying off.

Outlook and Conclusion

All the above is in the rearview mirror. What is the outlook for Coca-Cola shares here on?

Even inflationary and high interest rate pressures aren’t expected to put much of a dent on Coca-Cola. The company’s pricing power and brand allow it to pass the inflationary pressure to customers much better than a vast majority of the companies. Similarly, the financial strength and general pedigree allow Coca-Cola to carry higher floating rate debt [think of Adjustable Rate Mortgage] than most companies.

Something else of note is that Coca-Cola recently announced its 4th consecutive quarterly dividend payment of 44 cents a share. That means the next dividend announcement is almost certainly a dividend increase, which should mark the 61st consecutive dividend increase. Nothing is certain in the world of investing but Coca-Cola’s annual dividend increase is something close to certain. The dividend growth rate has recently slowed down to about 3% but with the stronger numbers in the last few quarters, it won’t be a surprise to see a 5% increase. That would place the new quarterly dividend around 46.25 cents per share.

The verdict?

S&P is down more than 20% YTD and Coca-Cola’s safety has rightly rewarded the stock. If premarket price holds, Coca-Cola will be flat to slightly positive YTD. That’s a remarkable 20% outperformance. Adjusting the forward EPS to about $2.50 based on the just-reported beat by 5 cents, Coca-Cola’s pre-market price of $59 means the stock appears fully valued at a forward multiple of 24. Coca-Cola does deserve some premium for its relative safety but the continuing momentum from COVID reopening and travel boost is bound to slow down sooner than later. Overpaying is never a good idea.

Coca-Cola remains a strong hold for us here. Given the upcoming dividend increase mentioned above and Coca-Cola’s average historical yield of about 3.30%, we will be interested to add shares around the $55-56 area. To understand why Coca-Cola’s annual dividend is “only” $1.76 per share and how the increasing dividends form a base for the stock price, read this wonderful blogpost on Seeking Alpha.

Disclosure: I/we have a beneficial long position in the shares of KO either through stock ownership, options, or other derivatives. 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.