Coca-Cola (NYSE: KO) recently reported its Q3 results, with revenues and earnings beating our estimates. KO stock is trading at 5.5x sales compared to the last five-year average of 6.8x, and we believe investors will likely be better off picking Coca-Cola for robust gains in the long run.
The company reported revenue of $12.0 billion, reflecting 8% growth from the prior year period and above our estimate of $11.5 billion. Its adjusted earnings of $0.74 per share were up 7% y-o-y and above our estimated $0.70 figure. In this note, we discuss Coca-Cola’s stock performance, key takeaways from its recent results, and valuation.
KO stock has seen little change, moving slightly from levels of $55 in early January 2021 to around $55 now, vs. an increase of about 10% for the S&P 500 over this roughly 3-year period. Overall, the performance of KO stock with respect to the index has been lackluster. Returns for the stock were 8% in 2021, 7% in 2022, and -12% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 9% in 2023 (YTD) – indicating that KO underperformed the S&P in 2021 and 2023.
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In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector, including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could KO face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, KO stock looks like it has ample room for growth. We estimate Coca-Cola’s Valuation to be $67 per share, reflecting around 20% upside from its current levels of $56. Our forecast is based on a 25x P/E multiple for KO and expected earnings of $2.67 on a per-share and adjusted basis for the full year 2023. The 25x P/E aligns with the stock’s last four-year average. The company raised its earnings outlook to now be in the range of $2.65 and $2.68 (vs. the $2.60 and $2.63 range earlier).
Coca-Cola’s revenue of $12.0 billion in Q3 was up 8% y-o-y. Sales were up 11% organically, led by a 9% rise in price/mix and a 2% growth in concentrate sales. The company is seeing more traction in the away-from-home business than at-home beverages. Coca-Cola saw its adjusted operating margin expand 20 bps y-o-y to 29.7% in Q3, vs. 29.5% in the year-ago period. Higher revenues and margin expansion, partly offset by a slightly higher effective tax rate, led to a 7% y-o-y rise in the bottom line to $0.74 on a per-share and adjusted basis in Q3’23.
While KO stock looks like it has ample 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.
|S&P 500 Return||-2%||9%||87%|
|Trefis Reinforced Value Portfolio||-5%||18%||504%|
 Month-to-date and year-to-date as of 10/26/2023
 Cumulative total returns since the end of 2016