Coca-Cola: Shares Fairly Priced, Strong Yield, Mixed Chart Ahead Of Q4 Earnings

Summary:

• Supermarket inflation eased to +3.8% YoY in December, but prices are still 40% higher than four years ago.
• Coca-Cola is the world’s biggest brand and largest manufacturer of soft drink concentrate, with over 70% of profits derived outside the US, but shares have underperformed in the last year.
• KO’s stock is near fair value with a lackluster technical situation, but it has a solid dividend yield.
• I highlight key price levels to watch on the chart ahead of quarterly results due out in February.

Supermarket inflation continues to retreat. For December, according to Nielson data as reported by BofA, conventional grocery store inflation verified at +3.8% on a year-on-year basis. That’s much cooler than annual rates seen at times in 2022, around +10%.

Still, prices are nearly 40% higher compared to the same time four years ago. Concerning industry news then struck early this month when French supermarket chain Carrefour pulled Pepsi from shelves due to severe price hikes. It’s a risk heading into the balance of the year as consumers around the world continue to see savings balances dwindle.

I have a hold rating on The Coca-Cola Company (NYSE:KO). I see shares near fair value while its technical situation is lackluster ahead of its Q4 2023 earnings results.

Supermarket Inflation Eases in December to +3.8% YoY

According to Bank of America Global Research, Coca-Cola is the world’s biggest brand and largest manufacturer of soft drink concentrate and syrups. It enjoys a 50% share of the world’s carbonated soft drink (CSD) market (and 44% share of the US market). KO continues to grow its portfolio of non-CSD brands as consumers’ diets shift. Over 70% of its profits are derived outside of the US. Key US brands include the Coca-Cola trademark, Sprite, Fanta, Minute Maid, Powerade, Dasani, and Nestea.

The Atlanta-based $258 billion market cap Soft Drinks & Non-alcoholic Beverages industry company within the Consumer Staples sector trades at an above-market 22.3 forward non-GAAP price-to-earnings ratio and pays a high 3.1% dividend yield as of January 4, 2024. Ahead of earnings due out in mid-February, shares trade with a low 13% implied volatility percentage while short interest on the stock is modest at just 0.6%.

Back in October, KO reported a solid Q3. Non-GAAP EPS of $0.74 verified a nickel better than the Wall Street consensus estimate while $12 billion of quarterly revenue, up 8% YoY, came in ahead of expectations by $580 million. It was a steady quarter with sound numbers in sales, profits, and margins. Notable gains were seen in its Latin America segment as well as globally in EMEA and APAC. The management team’s fourth-quarter outlook was one marked by continued growth, helped by comps that will take 2022 weakness from Russia and China off the table.

For 2024, moderating inflation will be a variable its management will have to navigate, with perhaps a more cost-conscious consumer. Also, unfavorable currency moves are another possible downside. Also, ongoing struggles in emerging markets could weigh on that geographic segment’s growth this year. Of course, lower commodity costs compared to a few years ago have helped the company. Finally, sell-side analysts have noted the risk from weight-loss drugs over the upcoming quarters.

KO: Strong Latin America Growth in Q3

On valuation, analysts at BofA see earnings rising at an above-inflation rate this year with an acceleration of EPS in 2025. The current consensus outlook, per Seeking Alpha, shows $2.68 of operating EPS for the fiscal year just ended while EPS growth is seen in the +4% to +7% range over the out years. Top-line growth should be steady in the low to mid-single digits.

Dividends, meanwhile, are expected to rise steadily over the coming quarters while free cash flow inches higher. KO’s EV/EBITDA ratio is above that of the broader market, which is a concern from a valuation point of view considering that the S&P 500’s earnings growth rate is seen near 10% this year.

Coca-Cola: Earnings, Valuation, Dividend Forecasts

If we assume $2.90 of non-GAAP forward EPS and apply a 21x multiple, slightly under its 5-year average given the somewhat soft-near term earnings growth trajectory and potential pressures from GLP-1 weight-loss drugs, then the stock should be near $61, making it about fairly priced today. While KO trades generally to the cheap side compared to its 5-year average valuation metrics, the company remains at a significant premium to the broad Consumer Staples sector.

KO: Mixed Valuation Metrics, Strong Dividend Yield

Compared to its peers, KO features impressive Seeking Alpha Quant grades. The main risk, as I highlighted above, is its valuation, but many of its somewhat defensive peers trade at a premium to the market for their ability to better weather macro downturns.

Still, KO has a soft growth outlook despite very healthy profitability and free cash flow figures. Share-price momentum is decent, but I will detail later that its chart is nothing to get excited about. Finally, KO’s EPS revisions have been 100% on the good side as the firm has beaten earnings estimates consistently over the past three years. Overall, Coca-Cola is ranked number one in its industry.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q4 2023 earnings date of Tuesday, February 13 BMO. No other volatility catalysts are seen on the calendar.

Corporate Event Risk Calendar

The Technical Take

With some negative industry news, a fair fundamental valuation, and a solid dividend yield, KO’s chart is not so impressive. Notice in the graph below that there are a pair of key price zones to monitor as 2024 gets underway. First, resistance is seen in the $63 to $65 area – the stock has pulled back from that range several times since the middle of 2022. On the downside, support is apparent in the low $50s – you can go all the way back to late 2021 to see that buyers have stepped up to the plate there. Near-term, the $59 level could be one to watch – a price point I noted a year ago.

Bigger picture, KO’s long-term 200-day moving average has turned negative in its slope, indicating that the bears have a mild grip on the trend, though the RSI momentum oscillator at the top of the chart is in a bullish zone. But with a high amount of volume by price from the low $50s (support) to the low to mid $60s (resistance), both the bulls and the bears may be frustrated.

Overall, the chart is neutral, and the stock has been an underperformer since late 2022.

KO: An Ongoing Trading Range

The Bottom Line

I have a hold rating on Coca-Cola. I see shares near fair value while the momentum situation is average at best ahead of the upcoming earnings season.

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