What A Recession Would Mean For Coca-Cola Stock?
Coca-Cola stock (NYSE: KO) has seen a 6% rise YTD, outperforming its peers and the broader markets, with Pepsi stock and Keurig Dr Pepper stock falling around 2%, and the S&P500 index down 19%. This market weakness can be attributed to recession fears and its impact on businesses. However, Coca-Cola has demonstrated a solid financial performance over the last few quarters, driven by a recovery in demand post-pandemic, and this trend is expected to continue over the coming quarters. For perspective, in 2021, Coca-Cola saw its sales surge 17% to $38.7 billion. All five segments – EMEA, Latin America, North America, Asia Pacific, and Bottling – saw double-digit sales growth. The company also saw its operating margins expand 50 bps to 26.1%, resulting in a 19% rise in its adjusted EPS to $2.32, compared to $1.95 in 2020, and $2.11 in 2019, before the pandemic. Looking at the latest quarter, its sales of $10.5 billion mark a 16% y-o-y growth, driven by an 11% rise in concentrate sales and a 7% rise in price/mix. The company also saw its operating margins expand over 200 bps in Q1 2022.
However, investors are now concerned about whether the momentum will hold up. The U.S. economy could be headed into a recession as the Federal Reserve will likely continue to hike interest rates aggressively to tame surging inflation. The central bank hiked rates by 1.25% over the last two months. There is a possibility of another rate hike as soon as this month. Consumer confidence is also declining as surging energy, food, and housing prices eat into household budgets. The markets are already pricing in some economic pain, with the S&P500 correcting by about 19% YTD.
We don’t think a recession will meaningfully hurt Coca-Cola. A recession is unlikely to hamper the demand for soft drinks significantly. With a rise in the number of social events, restaurants back to full-scale operations, and, more importantly, people venturing out, these factors are aiding beverage sales growth, a trend expected to continue going forward, as well. The company has taken price actions to aid its sales growth and margin expansion over the coming quarters.
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One big factor that will likely aid Coca-Cola’s margins is the decline in raw material prices. For example, aluminum prices are down from a high of about $3,700 per metric ton in early March 2022 and $2,850 in January to just under $2,500 currently. A couple of factors are impacting the near-term demand outlook for aluminum, including China’s zero-Covid policy, which has resulted in stringent lockdowns in several provinces, hurting demand. Moreover, the U.S. Fed and other global central banks have also been hiking interest rates aggressively to combat surging inflation. The markets are increasingly betting that this will hurt economic growth rates and, in turn, the demand for industrial commodities, including aluminum.
Coca-Cola’s management has guided for a high single-digit top and bottom line organic growth in 2022. We forecast the company’s revenues to rise 9% to $42.1 billion in 2022, driven by continued recovery in demand and better price realization. Moreover, economic indicators do not point to a profound recession this time around, with household savings rising post the pandemic and banks also remaining well-capitalized.
That said, much of the positives appear to be already priced in KO stock, given its 6% rise this year, vis-a-vis a 19% fall in the broader markets. At its current market price of about $63 per share, KO is trading at about 25x forward expected earnings, in line with the last three year average of 25x. We have a $67 per share valuation, which is only 7% ahead of the current market price, implying that investors may be better off waiting for a dip to enter KO stock for better gains in the long run. See our analysis on Coca-Cola Valuation: Is KO Stock Expensive Or Cheap? for more details on Coca-Cola’s valuation and how it compares with peers. For more information on Coca-Cola’s business model and revenue trends, check out our dashboard on Coca-Cola’s Revenue: How KO Makes Money.
While KO stock looks like it has only a little room for growth, it is helpful to see how Coca-Cola’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Furthermore, 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. Footlocker.
Despite inflation rising and the Fed raising interest rates, Coca-Cola stock has gained 6% this year. But can it drop from here? See how low can Coca-Cola stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
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