Consumer Staples Selloff Creates HUGE Opportunities

SAFE.

That’s how most people think about Consumer Staples.

Yet, the XLP Consumer Staples ETF plunged 12.3% in the last two months.

The S&P dropped 5.5% during that same period.

While the entire Consumer Staples sector saw massive price swings, Coca-Cola (KO) is a prime example of the untapped opportunities in this market.

Now, you might wonder why consumer spending is down. 

Contrary to popular media narratives that point to new fad weight loss drugs like Ozeimpic, the real reason is quite different

Despite what the media and Walmart said, people aren’t buying less because they’re on fad weight loss drug Ozeimpic.

Spending is pulling back because consumers drawing down their accumulated savings.

Does this create buying opportunities?

We think so…and coincidentally, in the top search by financial pros 

Coca Cola’s Business

Coca-Cola—the brand as iconic as apple pie with its bright red logos and wintery polar bears in scarves sold in over 200 countries.

Beyond they’re sugar water flagship soda, they’ve got an eye on health-conscious offerings and even a foot in the coffee market with brands like Costa, as well as Dasani water, Minute Maid, and Powerade.

Source: Coca-Cola Investor Relations

Coca-Cola segments its business into the following areas:

• North America (28% of total revenues) – It’s a plethora of beverages served ice-cold across the U.S. and Canada.
• EMEA (25% of total revenues) – Coca-Cola’s European and African adventure, featuring local favorites and tailored recipes.
• Asia Pacific (18% of total revenues) – Offering a burst of local flavors from Japan’s lemon-flavored tea to India’s spicy Thums Up.
• Latin America (11% of total revenues) – A vibrant mix of tropical beverages that are as diverse as the region itself.
• Global Ventures (10% of total revenues) – This includes the much-caffeinated Costa Coffee and investments in Monster Beverage Corp.
• Bottling Investments Group (BIG) (8% of total revenues) – This is where Coke’s nectar is bottled and prepped for consumption.

Financials

Source: Stock Analysis

With revenue growing and margins largely stable, the severe selloff seems out of place.

Revenue grew last quarter by 6% as management hiked the dividend by 17% (currently yields 3.5%). Plus, they announced another $10 billion share buyback program, which adds another 4.4% yield.

Heck, net debt is down to $27.5 billion from $33.5 billion in 2020.

Annually, Coke generates $9.3 billion in free cash flow, leaving $2-$3 billion a year to pay down debt.

While forex pressures will hurt earnings, that’s temporary and typically flips within a year.

Overall, there is nothing here to suggest any problems whatsoever.

Valuation

Source: Seeking Alpha

The biggest knock against KO is the lofty valuation. 

Even with the latest selloff, shares trade at over 20x earnings and cash.

That’s richer than other consumer staple goods except for Pepsi (PEP), which has similar multiples.

Since 2019, the stock has traded between 20x-30x earnings. So it’s at the lower end right now.

Before that, shares traded between 15x-20x earnings.

Yet, the high-interest rate environment could mean we head back down to a 15x-20x multiple.

Growth

Source: Seeking Alpha

At the same time, it’s hard to see shares selling off so hard when average revenue growth is in the high single digits and is expected to remain that way for quite some time.

Even the growth in EPS and free cash flow have been strong, especially compared to its peers.

Profitability

Source: Seeking Alpha

As mentioned earlier, KO kept its margins steady through price hikes to offset inflationary pressures.

That’s helped them achieve an outstanding return on equity and a solid return on assets and capital.

Our Opinion 10/10

While valuations might seem rich, Coca-Cola’s stock hasn’t yielded 3.5% from dividends since the COVID panic.

Its financials are solid with plenty of cash and revenue growth.

Could shares push lower? 

Of course.

Technical movements can always send a stock into a deeper discount.

That’s why we always keep some extra cash just in case.

But as for Coke’s stock here and now, we think it’s a bargain.

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