Coca-Cola’s Sales Down 16% But Stock Up 16%; Why?

Coca-Cola’s stock (NYSE: KO) gained almost 50% in 3 years, with the stock price rising from $37 at the end of 2016 to about $55 at the end of 2019. Though the stock price dropped in 2020 to $43 as of 15^th May 2020 due to the COVID-19 pandemic, the stock has still registered a cumulative return of 16% between 2016 and May 2020.

But how did they pull this off with Coca-Cola’s revenue down -16% from 2015 to 2019? Well, of course there is a reason – it’s earnings, the profits earned after all the expenses and taxes. Turns out Coca-Cola’s earnings margins (profits as a % of revenue) expanded over the last few years from less than 17% in 2015 to close to 24% in 2019. That’s a stunning growth.

So how did Coca-Cola get its earnings margins to expand like that? You can find a detailed analysis in our interactive dashboard Why Is There A Mismatch In The Rate At Which The Coca-Cola Company’s Revenues And Stock Price Have Changed?

One big change – instead of owning its own bottling plants, Coca-Cola now has more bottling plants that are franchised. Owning a bottling plant is a high-revenue but low-margin business. Whereas, under the franchise model, franchise owners record revenues from bottling plants they own, while Coca-Cola earns fees from franchisees. Thus, refranchising its bottling operations has led to sharp drop in revenue over the years, but has also driven margin expansion at the same time on account of lower cost of sales and SG&A expenses. Here is a detailed picture of how Coca-Cola’s margins expanded.

But that’s not the only change at Coca-Cola. The company has been on an acquisition spree over the last 2 years. It announced several key acquisitions in 2018, including Costa Limited (completed in Q1 2019) and a strategic partnership with BODYARMOR. Additionally, it also announced the acquisition of full ownership in Chi Ltd, which is a fast-growing leader in expanding beverage categories, including juices, value-added dairy, and iced tea in Nigeria. Here’s more on Coca-Cola’s revenues to understand the revenue mix and how each segment is performing.

Combination of these factors: margins rising by 45% from 16.6% in 2015 to 24% in 2019, while revenue decreasing by 16% from $44.3 billion in 2015 to $37.3 billion in 2019, meant earnings per share (EPS) in fact grew from $1.69 in 2015 to $2.09 in 2019.

During the same period, Coca-Cola’s P/E multiple was also up from 24.7x to 26.3x. However, following the outbreak of the COVID-19 pandemic and a subdued outlook for the food & beverage industry, the P/E multiple declined in 2020 and stands at 20.7x currently. We believe there is an upside with an opportunity for the P/E multiple to return to its 2018 level of over 30x. As per Coca-Cola Valuation by Trefis, we have a price estimate of $50 per share for the company’s stock, higher than its current market price of $43.

In contrast, here’s how Coca-Cola stands on comparison to close rival PepsiCo.

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