Ahead of its third quarter earnings, due to be reported on 22 October, Coca-Cola’s [KO] share price closed the week to 19 October at $49.62. Those invested in the beverage giant will be anxious to know if improving signs in global economies herald a change in fortune for Coca-Cola’s share price.
Coca-Cola’s share price has gone flat this year. It reached an all-time-high of $58.60 on 21 February but soon plummeted 38.1% to an intraday low of $36.27 on 23 March.
Despite climbing to the high $40s in June, Coca-Cola’s share price has been badly affected by pandemic, which has shuttered bars, restaurants and entertainment venues, and it has remained below $52 since 11 March. Coca-Cola’s share price closed at $50.25 on 20 October.
Have 2020’s challenges burst Coca-Cola’s share price bubble?
The impact of COVID-19 has hammered sales of Coca-Cola this year.
After all, you’re more likely to buy Coca-Cola if you’re out and you’ll pay more for it in venues like Disney Land or a sports stadium than you will at a supermarket, Parkev Tatevosian wrote in The Motley Fool.
In July, Coca-Cola announced second quarter income of $1.78bn, down 31.8% on the $2.61bn it registered in the same quarter of 2019, but still an improvement on the predictions of analysts ahead of the report. Net sales fell 28% to $7.2bn. At the time, James Quincey, CEO of Coca-Cola, said Q2 would likely be 2020’s most challenging for the company.
He appears to have been correct. Coca-Cola’s share price increased modestly on 21 July, when the announcement was made and it has, on the whole, maintained the level since.
Zacks expect Coca-Cola to announce sales of $8.35bn for Q3. This would represent a 16% increase on Q2, but would signify a 12.1% decline from the year ago quarter’s figure of $9.5bn. Zacks also forecast an EPS of $0.45, down 25% from $0.60 in Q3 2019, implying that profitability has declined more steeply than sales in the previous year.
Forecast drop in Coca-Cola's Q3 EPS versus the year ago quarter
The need to diversify
One factor potentially hampering Coca-Cola is product diversification.
Coca-Cola’s strategy has long revolved around streamlining its product offerings and low-growth so-called zombie brands — like Zico coconut water — being cut from its portfolio in an effort to focus attention and resources on the company’s most profitable lines.
However, according to some analysts this narrow focus, especially in comparison to its more adventurous rival PepsiCo [PEP], has hurt Coca-Cola during periods of upheaval and changing consumer habits, such as that seen during 2020.
Thanks to more adventurous product diversification, including a well-established foothold in the snack foods market, PepsiCo is closing the market cap gap between itself and Coca-Cola.
Investors in the latter stock will be hoping to see evidence of successful ventures into the snacks space in this earnings report or soon afterwards.
What to look out for in Coca-Cola’s Q3 report
If the Zacks consensus estimate of $8.3bn–8.4bn in sales proves accurate, it will represent a decent quarter in challenging circumstances for Coca-Cola.
However, as Zacks itself notes, Coca-Cola has a history of unexpectedly strong results, and there may yet be positive surprises in store for investors.
Analysts remain bullish about Coca-Cola’s share price, with the consensus rating among 21 analysts polled by CNN Money being to buy the stock — although the latest recommendations available were made in July.
Of these, no analysts gave a Sell or Underperform rating, with four recommending Hold, three Outperform and 14 Buy.
Analysts also predict Coca-Cola’s share price will increase over the next 12 months. Among 12 analysts offering forecasts for Coca-Cola’s share price over this period, the median price target was $55, a 19.5% increase on its current price (through 20 October’s close). While the lowest target was $49, just 1.2% below the latest price, the high target of $61 represents a 21.4% increase and, if realised, would set a new all-time-high for Coca-Cola’s share price.
|PE Ratio (TTM)||23.58|
|Quarterly Revenue Growth (YoY)||-28.50%|
Coca-Cola's share price vitals, Yahoo Finance, 22 October 2020