Is Coca-Cola Stock Fairly Valued At $55?
Coca-Cola stock (NYSE: KO), which is trading at $55 currently, looks like a good investment opportunity. The stock is now at the level at which it was at the beginning of 2020. KO stock traded at $60 in February 2020, just before the pandemic, and is still 8% below that level. The stock has recovered 47% from its March 2020 lows compared to a 110% rise in the S&P 500 during the same period. The recent rally was driven by the gradual lifting of lockdowns and a successful vaccine rollout which has further enthused markets in anticipation of faster economic recovery. Sales in take-home channels continue to outpace other channels, but the company is seeing improvement in on-premise selling channels as Covid-related restrictions are being gradually lifted. We believe that the stock has the potential to rise another 10% and reach its pre-Covid level with entertainment venues, sporting events, etc. likely to ramp up further in the coming months. These locations are now getting back on track to becoming fully operational. One of the most significant risks that the company faces to this upside is the uncertainty surrounding the extent of spread and severity of the Omicron variant. However, in the absence of another stringent lockdown and vaccination picking up, we expect the stock to rise from here as demand goes up. KO stock has a potential upside of about 10% to reach closer to $60. Our conclusion is based on our detailed comparison of Coca-Cola stock during the 2008 recession vs now 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 110% from the lows seen on Mar 23, 2020, with the Fed’s multi-billion dollar stimulus package keeping the economy afloat during the prolonged lockdown and the vaccination drive allowing things to gradually return to near-normal conditions despite several waves of Covid infections.
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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 a little over $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 a little less than $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 dropped 9% from $36.2 billion in 2017 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 $0.29 per share in 2017 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 decreased from $48 billion in 2017 to $43 billion in 2020, while its total cash decreased from around $11.4 billion to $9.1 billion over the same period. The company generated almost $10 billion in cash from its operations in 2020, which puts it in a reasonably comfortable liquidity position to deal with the current crisis.
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-September 2020: Recovery of demand, with the phased lifting of lockdowns – no panic anymore with number of cases appearing to have plateaued
- October 2020-February 2021: Unprecedented surge in Covid cases forcing a fresh round of lockdowns across the nation
- Since March 2021: Ongoing vaccination drive and gradual re-openings drive an improvement in demand – buoying market sentiment
Despite the recent surge in the number of new Covid-19 cases in the U.S., we expect an 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. As per Trefis, Coca-Cola valuation works out to $60 per share.
What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.
|S&P 500 Return||0%||25%||110%|
|Trefis MS Portfolio Return||0%||45%||290%|
 Month-to-date and year-to-date as of 12/8/2021
 Cumulative total returns since 2017
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