Is There A Better Pick Over Coca-Cola Stock?

KO: The Coca-Cola Company logo
The Coca-Cola Company

We think that Home Depot stock (NYSE: HD) currently is a better pick compared to Coca-Cola stock (NYSE: KO), given Home Depot’s better prospects and comparatively lower valuation. HD stock trades at a P/S ratio of 2.0x, compared to 7.2x for KO stock. Although both the companies are in different businesses, we compare them due to their similar market capitalization. While both companies saw a rise in revenue in recent years, Home Depot’s growth has been better.

If we look at stock returns, Coca-Cola’s 16% growth is much better than the -7% change for Home Depot over the last twelve months. This compares with a -1% change in the broader S&P 500 index. While both the companies are likely to see continued top-line expansion, Home Depot is expected to outperform. There is more to the comparison, and in the sections below, we discuss why we believe HD stock will offer better returns than KO stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Home Depot vs. Coca-ColaWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Home Depot’s Revenue Growth Has Been Stronger Over The Recent Years

  • Both companies posted sales growth over the last twelve months. Still, Coca-Cola’s revenue growth of 17% is marginally higher than 15% for Home Depot.
  • Looking at a longer time frame, Home Depot’s sales grew at an average growth rate of 12% to $151 billion in 2021, compared to $108 billion in 2018, while Coca-Cola’s sales grew at an average growth rate of 5% to $39 billion, currently, compared to $34 billion in 2018.
  • Of late, Home Depot has been witnessing a spending boom. Several macroeconomic factors continue to work in the company’s favor, including the high prevalence of working remotely, rising home prices, and limited inventory of homes for sale.
  • For Coca-Cola, a rise in the number of social events, restaurants back to full-scale operations, and, more importantly, people venturing out is aiding beverage sales.
  • Our Home Depot Revenue and Coca-Cola Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, Home Depot’s revenue is expected to grow faster than Coca-Cola’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 6.5% for Home Depot, compared to a 1.6% CAGR for Coca-Cola, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Coca-Cola Is More Profitable, And It Offers Lower Risk

  • Home Depot’s operating margin of 7% over the last twelve months is lower than 40% for Coca-Cola.
  • This compares with 14% and 32% figures seen in 2019, before the pandemic, respectively.
  • Home Depot’s free cash flow margin of 11% is also much lower than 33% for Coca-Cola.
  • Our Home Depot Operating Income and Coca-Cola Operating Income dashboards have more details.
  • Looking at financial risk, Home Depot’s 24% debt as a percentage of equity is higher than 14% for Coca-Cola, while its 3% cash as a percentage of assets is lower than 13% for the latter, implying that Coca-Cola has a better debt position as well as more cash cushion.

3. The Net of It All

  • We see that Home Depot has demonstrated better revenue growth, and it is available at a comparatively lower valuation.  On the other hand, Coca-Cola is more profitable, and it offers lower risk, primarily explaining the difference in the valuation of the two companies.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Home Depot is currently the better choice of the two.
  • The table below summarizes our revenue and return expectations for Home Depot and Coca-Cola over the next three years and points to an expected return of 20% for Home Depot over this period vs. a -3% expected return for Coca-Cola, implying that investors are better off buying HD over KO, based on Trefis Machine Learning analysis – Home Depot vs. Coca-Cola – which also provides more details on how we arrive at these numbers.

While HD stock may outperform KO, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Coca-Cola vs. Valvoline.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns May 2022
MTD [1]
YTD [1]
Total [2]
HD Return 2% -26% 129%
KO Return -2% 7% 53%
S&P 500 Return 1% -13% 86%
Trefis Multi-Strategy Portfolio 0% -17% 228%

[1] Month-to-date and year-to-date as of 5/3/2022
[2] Cumulative total returns since the end of 2016

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