Should You Hold Coca-Cola (KO)?

Year-to-date, Coca-Cola (KO)’s stock is up 17.5% (18.9% with dividends).

That might not seem like much until you realize the stock’s average annual gains over the last two decades is 9.1% with dividends.

Yet, this company isn’t a top search by financial pros.

But it was amongst retail investors.

Slow money doesn’t typically attract attention. However, a possible recession has folks looking for safety stocks.

Yet, is this iconic American company too expensive at these prices?

Coca-Cola’s Business

Although Coca-Cola calls Atlanta its home, the company is truly an international brand recognized in over 200 countries.

Coca-Cola produces and markets non-alcoholic beverages, including sparkling soft drinks, water, sports drinks, juice, dairy, and plant-based beverages. 

The company owns or licenses more than 500 brands, including Coca-Cola, Sprite, Fanta, and Minute Maid. 

It sells its products primarily through a network of company-owned or controlled bottling and distribution operations, as well as independent bottling partners, distributors, wholesalers, and retailers.

Coca-Cola segments its business into the following areas:

• Europe, Middle East & Africa (19% of total revenues) – Encompasses diverse markets from Western Europe to Africa
• Latin America (13% of total revenues) – Covers Central and South America, including key markets like Mexico and Brazil
• North America (39% of total revenues) – Includes the United States and Canada
• Asia Pacific (13% of total revenues) – Spans from China and Japan to Australia and New Zealand
• Global Ventures (6% of total revenues) – Manages global acquisitions and partnerships, including Costa Coffee
• Bottling Investments (10% of total revenues) – Operates company-owned or controlled bottling operations

In its second quarter 2024 earnings, Coca-Cola reported a 3% increase in net revenues to $12.4 billion, driven by 9% growth in price/mix and 6% growth in concentrate sales. 

Despite currency headwinds and the impact of refranchising bottling operations, comparable earnings per share grew 7% to $0.84.

The company’s “all-weather” strategy has proven effective, allowing it to capitalize on growth opportunities while navigating economic uncertainties in different regions. 

This approach focuses on five key pillars:

1. Diverse product portfolio
2. Geographic diversification
3. Pricing and packaging flexibility
4. Innovation and adaptation
5. Strong execution capabilities

This approach, combined with its focus on innovation and digital transformation, positions Coca-Cola to continue delivering value to shareholders in the evolving beverage market.

Financials

Source: Stock Analysis

Coca-Cola’s strength has faced challenges over the years.

From 2013 to 2017, the company underwent significant franchising in its bottling operations, transitioning ownership to local partners. This led to reported revenue declines, which ended in 2019.

The pandemic took a toll on sales, which quickly rebounded the following year.

Yet, inflation has been a persistent problem, forcing Coca-Cola to raise prices on consumers just to maintain margins.

However, those have slipped in recent years, though operating cash flow has held up reasonably well, sitting just over $11 billion.

Total debt has remained unchanged for a decade at $45 billion.

Dividends and share buybacks account for almost $10 billion annually, yielding around 3.4% in total.

Valuation

Source: Seeking Alpha

Coca-Cola trades at a P/E ratio and price to cash flow ratio 5% and 20% over their 5-year averages, respectively.

That puts it closer to high growth companies like Monster (MNST) and Celcius (CELH), and a bit more expensive than Pepsico (PEP), particularly on the price-to-cash-flow measure.

Growth

Source: Seeking Alpha

Pepsi and Coke both have similar revenue growth rates. However, Coca-Cola has seen higher profitability growth than Pepsi, even matching Monster in many categories.

Profitability

Source: Seeking Alpha

Much of Coke’s recent success can be attributed to its improvements in profitability.

Its margins beat those of its peers in every category listed above, leading to a remarkably high return on its equity, assets, and total capital.

Our Opinion 7/10

Although Coke’s gains make this year a performance outlier, they’re backed up by fundamentals.

Coke is running its best business in years, with fantastic margins and solid growth.

We’d argue that Coca-Cola is the best in the business. So, if you’re going to own one stock in this category, Coca-Cola should top your list.

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