Coca-Cola And CL Stock May Offer Little Returns In The Next Three Years

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

We believe Coca-Cola stock  (NYSE: KO) and its sector peer Colgate-Palmolive stock (NYSE: CL) may offer little returns in the next three years. KO is trading at 6.0x revenues compared to 3.5x for CL. Investors have assigned a higher multiple to Coca-Cola stock due to its superior revenue growth and profitability, as discussed below.

If we look at stock returns, Colgate-Palmolive, with -3% returns this year, has fared slightly better than Coca-Cola stock, down 6%, and both have underperformed the broader S&P 500 index, up 15%. There is more to the comparison, and in the sections below, we discuss the potential returns for KO and CL. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Coca-Cola vs. Colgate-PalmoliveWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Coca-Cola’s Revenue Growth Is Better

  • Coca-Cola’s revenue growth has been better, with an 8.4% average annual growth rate in the last three years, compared to 4.9% for Colgate-Palmolive.
  • For Coca-Cola, both at-home and away-from-home channels have grown, primarily driven by solid pricing trends.
  • North America and Latin America segments saw strong 19% y-o-y sales growth in 2022, led by both volume growth and better price realization.
  • Colgate-Palmolive is a leading manufacturer and distributor of household, health care, personal care, and veterinary products in global markets. It derives around 45% of its revenue from oral care products.
  • It has also seen its sales rise over the recent quarters based on pricing growth, partly offset by volume decline and forex headwinds. This trend is expected to continue in the near term.
  • Our Coca-Cola Revenue Comparison and Colgate-Palmolive Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, both companies are expected to see similar revenue growth in 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 about 2% for both – Coca-Cola and Colgate-Palmolive,  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 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

  • Coca-Cola’s reported operating margin slid from 29.9% in 2019 to 28.8% in 2022, while Colgate-Palmolive’s fell from 21.0% to 14.8% over the same period, partly due to a rise in raw material and packaging costs.
  • Looking at the last twelve month period, Coca-Cola’s operating margin of 28.0% fares much better than 13.2% for Colgate-Palmolive.
  • Our Coca-Cola Operating Income Comparison and Colgate-Palmolive Operating Income Comparison dashboards have more details.
  • Coca-Cola’s free cash flow margin of 24.3% is also higher than 15.8% for Colgate-Palmolive.
  • Looking at financial risk, both are comparable. Colgate-Palmolive’s 14% debt as a percentage of equity is slightly lower than 16% for Coca-Cola, and its 5% cash as a percentage of assets is lower than 13% for the latter, implying that CL has a better debt position, but KO has more cash cushion.

3. The Net of It All

  • We see that Coca-Cola has demonstrated better revenue growth and profitability and has more cash cushion. On the other hand, Colgate-Palmolive has a better debt position and is available at a comparatively lower valuation multiple.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe both will offer little returns in the next three years and can be avoided for better picks in the broader markets. Our Better Bet Than KO Stock dashboard offers superior choices over KO in the S&P500, including MRK and UNH.
  • If we compare the current valuation multiples to the historical averages, KO fares slightly better. Coca-Cola’s stock trades at 6.0x sales compared to its last five-year average of 6.8x, and Colgate-Palmolive stock trades at 3.5x revenues vs. the last five-year average of 3.9x.
  • Our Coca-Cola (KO) Valuation Ratios Comparison and Colgate-Palmolive (CL) Valuation Ratios Comparison have more details.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 7% for both Coca-Cola and Colgate-Palmolive over this period, based on Trefis Machine Learning analysis – Coca-Cola vs. Colgate-Palmolive – which also provides more details on how we arrive at these numbers.

While KO and CL may offer little returns in the next three years, 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 at how counter-intuitive the stock valuation is for Coca-Cola vs. Footlocker.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

Returns Jun 2023
MTD [1]
YTD [1]
Total [2]
KO Return 1% -6% 45%
CL Return 3% -3% 17%
S&P 500 Return 5% 15% 96%
Trefis Multi-Strategy Portfolio 8% 18% 271%

[1] Month-to-date and year-to-date as of 6/30/2023
[2] Cumulative total returns since the end of 2016

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