Coca-Cola Stock Undervalued At $50?

We believe at the current market price of $50, Coca-Cola stock (NYSE: KO) may be a decent opportunity at the moment. The stock traded around $60 pre-Covid in February 2020 and is 17% below that level. However, the stock has gained 32% since its March lows of $37, following the Fed’s stimulus package and measures announced by other economies. But, the recent spike in Covid-positive cases and emergence of new virus strains will stop the company from seeing a full recovery to pre-Covid levels any time soon. Despite the recent healthy growth, we believe that the stock still has a modest upside from its current level driven by expectations of rising demand and easing of supply constraints, along with improving investor sentiments with vaccines in place. Our conclusion is based on our detailed comparison of Coca-Cola stock performance during the current crisis with that during 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, 2020, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/24/2020: S&P 500 recovers 75% from the lows seen on Mar 23, 2020, 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
• 12/31/2009: 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 $29 in September 2007 (pre-crisis peak) to levels of around $20 in March 2009 (as the markets bottomed out), implying KO stock lost 29% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of about $29 in early 2010, rising by 40% 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 Over Recent Years

Coca-Cola revenues declined more than 20% from $41.9 billion in 2016 to $33 billion in 2020, primarily led by refranchising (franchise owners record revenues from bottling plants, while Coca-Cola earns fees from these franchisees) of its bottling plants as well as the impact of lockdowns during the pandemic in 2020. However, with bottling being a low-margin business, the refranchising of it led to a rise in margins and thus earnings went up from $1.51 per share in 2016 to $2.09 in 2019. EPS fell to $1.80 in 2020 due to the pandemic impact but is still higher than the years before 2019.

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

KO’s total debt increased from $33 billion in 2016 to $42.5 billion in 2020, while its total cash decreased from around $12.6 billion to $6.8 billion over the same period. The company generated over almost $10 billion in cash from its operations in 2020, which puts it in a reasonably comfortable 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
• Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Despite the recent surge in the number of new Covid-19 cases in the U.S., we expect continued improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 results, we believe The Coca-Cola Company stock has the potential for modest gains once fears surrounding the Covid outbreak are put to rest

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