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Will Coca-Cola’s share price benefit from diversification strategy?

Coca-Cola, the world’s largest soft drinks company, has enjoyed mixed fortunes over the last few years. Last year the company’s share price gained 20%, while since the end of 2017 to the end of 2019 its P/E multiple dropped from 147x to 26x.

The stock has not been immune to the recent downturn either. March was a particularly tough month as Coca Cola [KO] saw its share price drop 17% — outstripping the 12.5% drop in the S&P 500 over the same period.

Coca-Cola, and its share price, was hit by a raft of restaurant closures and the cancellation of major entertainment events, which hammered major sources of sales.

Coca-Cola is expected to announce its first-quarter 2020 financial results on 21 April and investors will be keen to see if measures taken by management have done enough to help traverse a rocky patch for sales, and the company’s share price performance.

 

 

 

Does Coca Cola have more pop?

At the end of March, analysts at Trefis said the share price was likely to remain close to its end of month level of $43. However, as of 14 April the share price was trading at $49 per share — a year-to-date decline of just 11%. This suggests that investors like what the company is doing to maximise sales during the global lockdown.

The company eliminated more than 600 unproductive products in 2019 and worked to reposition the business through changes in core products, pack sizes and serving sizes, as well as through deals like the recent acquisition of coffee company Costa.

“Management has recognised that [Coca-Cola] needs to diversify revenue away from sugary soda and we expect it to make progress toward this goal,” says Argus Research analyst Chris Graja, suggesting its earnings and share price could rebound.

Furthermore, Daniel Martins of DM Martins Research says the company’s pricing and mix look solid while aggressive expectations for bottom-line growth suggest confidence in margin expansion, along with growth in free cash flow.

“Due to a combination of the stock's diversification properties, fundamentals that will likely remain undisturbed in the long run and share prices that have come down sharply and unusually fast, Coca-Cola seems like a stock worth adding to a stock portfolio ahead of what will most likely be a period of global economic contraction,” he says.

“Due to a combination of the stock's diversification properties... Coca-Cola seems like a stock worth adding to a stock portfolio ahead of what will most likely be a period of global economic contraction” - Daniel Martins, DM Martins Research

 

He describes a trailing P/E of 20x and dividend yield of 3.7% as  being at least on par with comparable metrics during the two previous recessions.

 

Realigning expectations

At the end of February, Coca-Cola announced it was estimating a fall of between $0.01 and $0.02 in earnings per share for the first quarter and that based on its latest forecasts it’s expected to achieve its previously provided full-year guidance.

However, the events of the weeks since will undoubtedly have a further impact on earnings per share. If the upper estimate of a $0.02 per share reduction bears out, that would be seen as an acceptable result in the context of the analyst consensus for full-year earnings per share of $2.25.

On 20 March Coca-Cola confirmed that it would not achieve its financial outlook for 2020. The company had forecast a 5% increase in organic revenue and a rise of 7% in adjusted earnings per share, but a combination of social distancing measures and currency fluctuations are expected to take a heavy toll.

Coca-Cola added more than $5bn to its cash savings the same day and revealed that it was ramping up its efforts to increase online sales as well as sales in retail outlets. In a note to investors, executives said they were confident about the company’s ability to navigate from a liquidity perspective.

Looking ahead, analysis by Trefis of how Coca-Cola recovered from the global financial crisis of 2008 suggests that the drinks giant may lag the post-COVID-19 recovery, with the firm pointing out that the stock fell slower but also recovered slower than the S&P 500 after 2008.

However, Argus Research expects the company to grow earnings at a compound annual rate of 8% over the next five years and has raised its rating from hold to buy and initiated a price target of $54 a share.

 

Market Cap$210.033bn
PE ratio (TTM)23.63
EPS (TTM)2.07
Quarterly Revenue Growth (YoY)16.20%

Coca-Cola share price vitals, Yahoo Finance, 15 April 2020

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