Coca-Cola Stock Recovers Almost 40% But More Gains Are On The Way

Coca-Cola stock (NYSE: KO) currently trades at $51 and is still down 6% so far this year. It traded around $59 pre-Covid in February 2020 and is more than 13% below that level. However, the stock has gained 37% since its March lows of $37, following the Fed’s stimulus package and measures announced by other economies. Despite the recent healthy growth, we believe that the stock still has an upside of about 10% from its current level driven by expectations of rising demand and easing of supply constraints following the gradual lifting of lockdowns. 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.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019:             Coronavirus cases first reported in China
• 1/31/2020:                WHO declares a global health emergency.
• 2/19/2020:                Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020:                S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/23/2020:  S&P 500 recovers 51% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how Coca-Cola and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Coca-Cola and S&P 500 Performance During 2007-08 Crisis

We see KO stock declined from levels of around $19 in September 2007 (pre-crisis peak) to levels of around $14 in March 2009 (as the markets bottomed out), implying KO stock lost 27% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of about $20 in early 2010, rising by 44% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.

Coca-Cola Fundamentals

How Do Coca-Cola’s Fundamentals Look Over Recent Years?

Coca-Cola Revenues declined more than 15% from $44.3 billion in 2015 to $37.3 billion in 2019, primarily led by refranchising (franchise owners record revenues from bottling plants, while Coca-Cola earns fees from these franchisees) of its bottling plants. However, with bottling being a low-margin business, refranchising of it led to a rise in margins and thus earnings went up from $1.69 per share in 2015 to $2.09 in 2019.

Survival Check

Does Coca-Cola Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

KO’s total debt decreased from $33 billion in 2015 to $32 billion in 2019, while its total cash decreased from around $13 billion to $10 billion over the same period. The company generated over $10 billion in cash from its operations, which puts it in a good position to deal with the current crisis.

Conclusion

Phases of Covid-19 crisis:

• Early- to mid-March 2020:  Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward:  Social distancing measures + lockdowns
• April 2020:                                    Fed stimulus suppresses near-term survival anxiety
• May-June 2020:                        Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-September 2020:           Poor Q2 results, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy expectations

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. to buoy market expectations. As investors focus their attention on expected 2021 results, we believe Coca-Cola’s stock has the potential for modest gains of about 10% in the near term as demand and supply get back on track with lockdowns being lifted and the company benefits from recent acquisitions.

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So while Coca-Cola’s investors have a chance to see further growth in their wealth, you can also see how Coca-Cola’s performance compares with close rivals PepsiCo and with Keurig Dr Pepper.

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