Is Coca-Cola’s Stock Hitting Its Decade Low Of $30 A Possibility?

by Trefis Team
Coca Cola
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Despite an almost 15% decline in Coca-Cola’s (NYSE: KO) stock since the beginning of this year as the spread of the novel Coronavirus rattled the stock markets and the broader economy, at the current price of $47 per share, we believe Coca-Cola has a significant downside if there are no signs of abatement of the crisis in May 2020. The key is Coca-Cola’s stock is still about 10% higher than it was at the beginning of 2018, a little over 2 years ago. We estimate that Coca-Cola’s stock price could decline to levels of around $30 (worst-case scenario) if its revenues fall by 25% vs. FY’19, its margins contract by 20% to about 19% in 2020 (as it continues paying its staff along with incurring other fixed expenses), and its valuation multiple falls to levels of around 25x from over 26x at the end of FY’19 and 30x at the end of FY’18. Below, we summarize this possible downside case for Coca-Cola, which is detailed in our interactive dashboard analysis The Coca-Cola Company Downside: How Low Can The Coca-Cola Company Stock Go?

So what’s the likely trigger and timing to this downside?

  • The global spread of coronavirus has led to slowdown in industrial and economic activity, thus affecting consumer spending power. Lower consumption would lead to lower demand for food and beverages, as partial employment becomes widespread. As most of the economic impact of the crisis started being felt in March, Coca-Cola’s Q1 was largely shielded. But we believe Coca-Cola’s Q2 results in July will confirm the hit to its revenue, with the management having already warned that the next few quarters will be difficult, unlike Q1 2020. The company is also likely to lower its full-year 2020 guidance with its Q2 announcement.
  • Specifically, we believe the full-year revenue expectations formed by the market may be closer to $28 billion about 25% lower than its 2019 revenue of $37.3 billion, and 12% lower than the 2018 revenue of $32 billion. Our dashboard shows key components of Coca-Cola’s Revenues
  • The market isn’t going to stomach this well, and Coca-Cola’s P/E multiple is likely to shrink to about 25x from 26.3x seen in 2019 and 30x seen in 2018.
  • The 25% reduction in revenues will not accompany a proportional reduction in expenses, as compensation expenses and other fixed costs like rent for bottling plants and upkeep of other machinery are likely to fall by a smaller percentage. This will likely result in the net income margin shrinking by 20% from 24% in 2019 to about 19% in 2020.
  • This, in turn, would mean a double whammy of 40% lower earnings and 5% lower P/E multiple, translating into Coca-Cola’s stock price drop of about 34%, close to $30.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse in later quarters of 2020, and as the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of the coronavirus outbreak’s impact on a diverse set of Coca-Cola’s multinational peers like PepsiCo. The complete set of coronavirus impact and timing analyses is available here.

Overall, we believe Coca-Cola’s stock price at levels of $45 and below provides a buying opportunity for investors willing to be patient. As per Trefis base-case scenario Coca-Cola’s Valuation works out to $50.


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