Coca-Cola – A Portfolio Staple

While the Nasdaq and S&P 500 are spiraling down to correction/bear market territory, investors are pouring their funds into safe-haven stocks.

And despite the war in Ukraine, the Fed getting ready to raise interest rates, and commodity prices exploding—some stocks in the consumer staples sector are near 52-week highs. 

Shares of Coca-Cola (KO) are actually up more than 5% YTD, which is not too far from its 52-week highs. And while +5% YTD doesn’t sound ultra exciting, it looks a lot better than some high growth stocks like Roblox (RBLX) -59% YTD,  Affirm (AFRM) -64% YTD, and Meta (FB) -40% YTD.

And when you compare its performance to its peers Celsius Holdings (CELH), PepsiCo (PEP), Keurig Dr. Pepper (KDP), and Monster Beverage (MNST)—Coca-Cola is outperforming them YTD. 

What are they doing better than the competition?

Let’s take a deep dive. 

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Coca Cola’s  Business

Founded in 1886, and headquartered in Atlanta, Georgia—no other company on the planet is larger in the non alcoholic space than Coca-Cola. Its beverage line includes: Topo Chico, Vitaminwater, Dasani, Sprite, Schweppes, Coke/Coca-Cola, Minute Maid, Fanta, BodyArmor, AHA Sparkling Water, Powerade, and Honest Tea, to name a few. 

Coca-Cola employs over 700,000 people and its products are offered in over 200 different countries. 

The chart below showcases Coca-Cola’s net operating revenue and sources (as a percentage term).

Coca-Cola is a dominant player in the cold non alcoholic beverage sector. However, the firm believes it can continue to grow in the hot, non alcoholic beverage sector. It owns Costa Coffee which is a coffeehouse chain with more than 3800 locations in the United Kingdom.

The firm has laid out a long term plan for continued growth in the future.  

If there has been one knock on Coca-Cola, it has been some of the health concerns with some of its products, specifically, high sugar drinks like Coca-Cola Classic.

However, the brand has made significant strides over the years by acquiring brands that offer healthier options like Vitamin Water, AHA Sparkling Water, Topo Chico, Smart Water, Fairlife, Fuze Tea, and Honest Tea, to name a few. 

Furthermore, the firm has taken strides towards reducing its absolute greenhouse gas emissions by 25% by 2030, and to be net-zero carbon emissions by 2050. 

Financials

Coca-Cola’s revenue growth year over year outpaced that of Pepsi and Keurig Dr. Pepper.

It’s even better at making money if you compare its gross profit margin to those companies:

Despite all the uncertainty in the world, and supply concerns some industries are facing, Coca-Cola has cash to weather the storm. The firm’s short-term assets are 1.13X its short-term liabilities. 

Moreover, the company’s financial debt to EBITDA ratio is 2.77, which means it generates enough earnings to cover its debt obligations. 

And its 3-year cash flow compound annual growth rate stands at 22.8%. Coca-Cola distributes an annual dividend of $1.68 per share to its shareholders. 

It has increased its dividend for 59 years straight.

Valuation

Based on its 5-year average PE ratio, one could argue that Coca-Cola is cheap at these levels. 

Its current Price to earnings ratio is 27.81 which is significantly less than its 5-year average of 45.63. 

However, given the overall weakness in the stock market, all the uncertainty happening in Easern Europe, and the Fed getting ready to raise interest rates—it’s no secret that investors have piled into consumer defense stocks like Coca-Cola. 

That means Coca-Cola is trading at premium relative to other stocks in the sector. But not that far off from its main competitors. 

It also has a very attractive PEG (price to earnings growth) ratio of 1.08, which takes growth into account.  

Our Opinion – 8/10

Coca-Cola is one of the most recognized global brands in the world. And while the company has been around for over a hundred years, it still finds pockets to grow. 

While we don’t think prices are exactly cheap here. We don’t think they are overly expensive either, because we believe investors will continue to pay for the safety and dividends Coca-Cola offers.