Coca-Cola’s Stock At $45: More Gains?

by Trefis Team
Coca Cola
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Coca-Cola stock (NYSE: KO) has gained more than 20% since late March (vs. about 41% for the S&P 500) to reach to its current level of $45. This is after dropping to a low of $38 in late March, as a rapid increase in the number of Covid-19 cases spooked investors, and led to increased fears of an imminent global economic downturn. The stock is currently about 24% below its February 2020 high of $60. Are the gains justified or are investors getting ahead of themselves? We believe that the stock recovery is justified, and think the stock price is likely to increase further at a modest rate from its current level in the near term. Our conclusion is based on our detailed comparison of Coca-Cola’s stock performance during the current crisis with that during the 2008 recession in our dashboard analysis.

How Did Coca-Cola Fare During 2008 Downturn?

We see that KO’s stock declined from levels of around $29 in October 2007 (the pre-crisis peak) to roughly $20 in March 2009 (as the markets bottomed out) – implying a 32% erosion of value from its approximate pre-crisis peak. This marked a drop that was smaller than the broader S&P, which fell by about 51%.

However, KO’s stock recovered strongly post the 2008 crisis to about $29 in early 2010 – rising by about 44% between March 2009 and January 2010, as against the S&P which bounced back by about 48% over the same period.

In comparison, KO’s stock lost 37% of its value between 19th February and 23rd March 2020, and has recovered over 20% since then. In comparison, the S&P fell by about 34% and rebounded by about 41%.

Is The Recovery Warranted & Can We Expect Further Gains?

The global spread of coronavirus in early 2020 affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending, which would lead to lower demand for food and beverages, in turn affecting Coca-Cola’s revenues. Coca-Cola’s Q1 2020 was largely shielded as the impact of coronavirus has mostly been felt since March.  However, we believe the company’s Q2 results in July will confirm a hit to its revenues and earnings, as most of the impact of the crisis was felt during Q2. KO’s management has already announced that the next few quarters will be difficult unlike Q1 and it will not meet its earlier 2020 outlook due to the Covid-19 pandemic’s impact on its business, and we believe the company is likely to lower its full-year 2020 guidance with its Q2 announcement.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. compared to the rate seen in April-May to boost market expectations. Additionally, the gradual lifting of lock downs is also giving investors confidence that developed markets have put the worst of the pandemic behind them. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results.

As the global economy opens up and lock downs are lifted in phases, consumer demand is expected to pick up, and in addition to that, reduction of supply bottlenecks and completion of most of KO’s refranchising activities (franchise owners record revenues from bottling plants they own, while Coca-Cola earns fees from franchisees) will also lead to higher sales. This could be reflected toward the end of 2020, followed by healthy revenue growth in 2021. Additionally, the company’s margins are also expected to continue the growing trend post-Covid, following the refranchising of low-margin bottling plants. Though the stock has recovered at a healthy rate between February and March 2020, with investors’ focus now primarily shifting to 2021 numbers, we believe expectations of healthy revenue and margin growth is likely to drive the stock higher from its current level of $45. Coca-Cola’s valuation by Trefis gives a fair price estimate of $50 per share, higher that its current market price

So, while Coca-Cola seems to have a modest upside from its current level, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

For further insight in to the food and beverage industry, you can see a comparative analysis of PepsiCo vs. Coca-Cola and why we feel Keurig Dr Pepper is better placed compared to Coca-Cola.


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