The Coca Cola Company (NYSE: KO) has remained a solid defensive consumer stock over the past two decades given its very popular product range, particularly classic Coca-Cola. Given that the soft drink has consistently ranked at the top worldwide with a brand equity of over $74 billion in 2021, it’s no wonder the company holds the majority 53% of the value share for the sparkling wine market back then. Combined with the improving net income/FCF profitability, tight operating efficiencies, and decent dividend yields, we expect KO will indeed perform excellently for many years to come.
Nonetheless, it’s also apparent that KO is now trading at a slight premium, with a minimal safety margin. Given the bearish sentiment and the market’s fears of a possible recession, we could see a moderate decline akin to the 2009 recession. KO stock was down 37.3% at the time, from $31.15 in January 2008 to 19 $.52 in March 2009. Therefore, for now, we recommend patience as we may see a more attractive entry point for this superb blue chip stock.
Despite multiple headwinds, KO is the cash cow king
Despite the short-term decline in sales and annual decline in the 2020 financial year, KO recovered very quickly last year. In the last twelve months (LTM), the company reported revenue of $40.13 billion and a gross margin of 60.3%, representing an impressive revenue growth of 7.6%, or a minimal decline of -0.5 percentage points of the gross margin at the level of the 2019 financial year. In addition, KO also reported record net income of $10.31 billion with margins of 25.7% in the LTM, an excellent increase of 15.5%, or 1.8 percentage points, over fiscal 2019 levels. The company’s outstanding supply chain management and operational efficiencies in the current macro environment are therefore noteworthy.
Therefore, KO also improved its Free Cash Flow (FCF) generation with an FCF of $10.24 billion and an FCF margin of 25.5% in the LTM, which was an excellent improvement of 21.6% and 2.9, respectively percentage points compared to the level of the 2019 financial year. Cash and equivalents on the balance sheet also remain excellent, with $7.99 billion reported in the LTM. Notably, in FY2009, KO reported an impressive 17.5% increase in its net profit profitability and 10.5% in FCF production, despite a 3% year-on-year decline in its revenue during the then recession. This underscores the tremendous relevance and resilience of its cash cow business during rising inflation and the potential recession. As a result, we have no doubt that KO will indeed catch on for decades to come.
Given the devastating effects of the COVID-19 pandemic, it’s evident that KO has also taken on more financial commitments over the past two years. The company reported long-term debt of $37.49 billion with interest expense of $1.34 billion in the LTM, a notable increase of 36.1% and 41% from fiscal 2019 levels, respectively. Nonetheless, it is also important to note that KO had also reduced its net PPE assets to $9.78 billion, with a reduced capital expenditure of $1.37 billion in the LTM, representing a strategic reduction of 20%, or 33.1% from FY 2019 levels. This emphasizes the competent capital management of the management.
Over the next four years, KO is expected to report revenue and net income growth at an impressive CAGR of 6.13% and 7.07%, respectively. Additionally, net income margin is expected to continue to improve from 25.3% in fiscal 2021 to 26.1% in fiscal 2025, a notable improvement from the pre-pandemic average of 19.1%.
For fiscal 2022, the consensus estimates that KO will report revenue of $41.9 billion and net income of $10.74 billion, a huge year-over-year improvement of 8.4% and 9.9%, respectively is equivalent to. This is important as the market believes the company has the ability to sustain its hyper-pandemic sales and profitability going forward. Additionally, analysts will be keeping a close eye on KO’s performance in the second quarter of 2022, given the consensus estimates for Revenue of $10.53B and EPS of $0.67, increases of 3.96% and -1.66%, respectively. year-on-year comparison. Nonetheless, we are confident that the company will continue to beat estimates, as it has for the past ten consecutive quarters.
KO remains a decent dividend stock for long-term holding
KO 10Y stock price (adj) and dividend yield
KO has had a discernible long-term uptrend in stock prices over the past decade. Though the stock’s dividend yield has declined slightly from 3.8% in 2014 to 3% in 2022, its dividend payout has grown at a CAGR of 4.9% over the past eight years. The fact is also undeniable that given the steady growth of its share price, KO has delivered an excellent 10-year total price return of 124.8% and a 5-year total price return of 66.1%.
As can be seen from the chart, KO has also kept its diluted shares outstanding and stock-based compensation (SBC) expenses relatively stable over the past several years. For fiscal 2022, we expect a modest decrease in share count of up to 4.2 million given the Company’s $500 million share repurchase program for approximately 160 million shares. This will return even more value to its long-term investors despite the macro woes.
So is KO stock a buy?Sell or hold?
KO 5Y EV/Sales and P/E ratings
KO is currently trading at 7.26x EV/NTM sales and 25.28x NTM P/E, which is above its 5-year median sales of 6.99x, although it is above its 5-year median P/E of 23.69x. The stock is also trading at $62.94, down 6.3% from its 52-week high of $67.20, albeit at a premium of 20.3% from its 52-week low of $52.28. It’s evident that despite the brief dip at the start of the COVID-19 pandemic, KO stock has seen a strong rally over the past two years with no sign of abating.
KO 5Y stock price
Nonetheless, we have to admit that KO stock is now also trading with a minimal margin of safety given the consensus estimates price target of $70.14 with only 11.44% upside. Given the current bearish market sentiment, we cannot justify paying this premium, despite the company’s improvement in net income/FCF profitability and ordinary dividend yield of 2.73% over the past decade.
Additionally, KO is expected to report its Q2 2022 results on July 26, 2022, which will provide us with better clarity on its performance to date. Combined with the 21.8% decline in the S&P 500 Index in the first half of 2022, we encourage all investors to be patient and even more patient before gaining exposure in this highly volatile market environment.
That’s why we rate KO stock as a Hold for now.