Coca-Cola’s Stock Still Too High At $45?


After almost a 22% decline in Coca-Cola’s (NYSE: KO) stock since the beginning of this year, at the current price of $43 per share, we believe Coca-Cola’s stock is likely to remain around the current level considering the impact of the ongoing coronavirus crisis. Also, Coca-Cola’s stock is only 6% lower than it was at the beginning of 2018, a little over 2 years ago. And is higher than it was at the beginning of 2017. Our dashboard What Factors Drove 0.5% Change In Coca-Cola Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Some of the sharp stock price rise of the last 2 years is justified by the roughly 8.8% growth seen in Coca-Cola’s revenues from 2017 to 2019, the effect of which was further accentuated by a whopping 7x rise in net income margin, which increased from 3.4% in 2017 to 23.9% in 2019. which translated into 7.4x growth in net income from $1.2 billion in 2017 to $8.9 billion in 2019. Earnings per share (EPS) increased 7.2x from $0.29 in 2017 to $2.09 in 2019, with shares outstanding remaining stable.

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However, a drop in Coca-Cola’s P/E multiple has almost fully offset any rise in the company’s earnings. KO’s P/E multiple dropped from 147x at the end of 2017 to 26x by the end of 2019. The multiple has further dropped to 20.5x currently. This reflects over an 86% decrease in P/E multiple from 2017 to March 2020. However, this sharp drop in the P/E multiple between 2017 and 2019 was not due to a change in the company’s fundamentals, but was mainly due to an unusually low EPS in 2017 (due to one-time charges), which coupled with a stable stock price, led to a significantly inflated P/E in 2017. On the contrary, the decrease in P/E multiple since the beginning of 2020 was due to the impact of coronavirus, which we explain below.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. KO’s stock is down by about 27% since January 31 after World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of over 21%. Moreover, about 15% of Coca-Cola’s total revenue comes from the Asia Pacific region, which has been the worst impacted by the outbreak. Lower consumer spending and consumption would lead to lower demand for food and beverages, in turn affecting Coca-Cola’s revenues.

We believe Coca-Cola’s Q1 results in April will confirm the trend in revenues. It is also likely to accompany a lower Q2 as-well-as FY’20 guidance. If there isn’t clear evidence of the containment of the virus at the time of the earnings announcement, we believe there is a possibility that Coca-Cola’s stock could see a further downside. However, if there are signs of abatement of the crisis by the time Q1 results are announced, the company’s stock could see a modest upturn. But in the current scenario, we believe Coca-Cola’s stock is likely to remain around its current levels.

View our dashboard analysis Coronavirus Trends Across Countries, And What It Means For The U.S. for the current rate of coronavirus spread in the U.S. and forecasts on where it could be headed, based on comparison with other countries. Our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a more complete macro picture of historic crashes and how the sell-off during early March compares.

 

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