Coca-Cola Company

KO Details

Key Positives:

Higher Net Margin (24.6% in 3QFY21 vs Industry Median of 12.7x)

Higher Return on Equity (11.1% in 3QFYFY21 vs Industry Median of 4.0%)

Key Negatives:

The rising cost of raw materials, Higher Asset/Equity ratio (4.09x in 3QFY21 vs Industry Median of 2.17x)  

Coca-Cola Co. (NYSE: KO) is The Coca-Cola Company, a beverage company, that manufactures, markets, and sells various nonalcoholic beverages worldwide. The company provides sparkling soft drinks; water, enhanced water, and sports drinks; juice, dairy, and plant-based beverages; tea and coffee; and energy drinks. It also offers beverage concentrates and syrups, as well as fountain syrups to fountain retailers, such as restaurants and convenience stores. The company was founded in 1886 and is headquartered in Atlanta, Georgia.

Latest Updates:

• Launch of Simply-Branded alcoholic drink in partnership with Molson Coors Beverages: On January 25, 2021, Coca-Cola Co. launched Simply-branded alcoholic drinks in the United States this summer, partnering with a well-known beer player of the industry: Molson Coors Beverages Co. (NYSE: TAP). This launch got the company at par with its peers such as PepsiCo Inc (PEP.O), Monster Beverage Corp. (MNST.O), etc which already have invaded the alcohol space.
• Constellation Brands and Coca-Cola Co. came together for a new brand: On January 6, 2022, the Coca-Cola Co. and Constellation Brands Inc (NYSE: STZ) signed a brand authorization agreement to bring the FRESCA brand into beverage alcohol. This will be an end-to-end process from manufacturing, marketing, distribution, and launches of new products under the FRESCA brand to meet the emerging trends in this space. (https://www.nasdaq.com/press-release/constellation-brands-enters-agreement-with-the-coca-cola-company-to-bring-the-frescar)

Q3FY21 Results:

• Increase in revenues: The company reported a staggering growth of 16% in its Net revenues, resulting in USD 10.0 billion in absolute numbers. The share of the internally generated revenues grew at 14% and the performance comprised of 8% growth in concentrated sales and 6% in price/mix.
• Marginal increase in margins: With the consumer demand and revenues rising at a decent pace, the margins dint showed much of the turnaround and the company recorded 28.9% in terms of the operating margin as compared to the 26.6% in the previous year and the nonoperating margins were almost similar to the prior-year period. This could be the result of the rising wages and cost of raw materials and the bottlenecks in the shipping industry globally, impacting the margins.
• Earning per share: the EPS grew 41% to USD 0.57 and the comparable EPS (Non-GAPP) grew 18%, and in absolute terms to USD 0.65.Net Interest Margin (NIM) in Q2FY21 improved by 32 bps as compared to Q2FY20.
• Cash flows: The company’s year-to-date cash flow from operations was USD 2.9 billion, up by USD 3 billion as compared to a similar period in the previous year. The growth in such robust cash flows was driven by staggering business performance with improved efficiency in the system such as working capital initiatives to reduce the short-term borrowing costs.  

Key Risks:

• Supply chain disruption and Labour shortage: The various COVID-19 restrictions, got the supply chain and especially the shipping industry on its knees, hammering the profit margins and production line of the biggest giants such as Coca-Cola too. Further, the shortage of labor workforce can also out weight with the rising cost of raw materials, hampering the profitability of the company unless we see some silver lining in the near term. One of the operation reasons of concern is the foreign currency transaction costs and losses as the company is spread globally and deriving its revenues across borders, impacting the forex losses and gains.

Valuation Methodology: Price/Cash Flow Per-share Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

KO Daily Technical Chart (Source: REFINITIV, Analysis by Kalkine Group)

Stock Recommendation:

KO's stock price rose 8.21% in the past three months and is currently heading towards the north and approaching the top of the channel. The stock is consistently above both the 50 DMA & 200 DMA, showing significant strength. One of the leading indicators: The relative strength Index, recently printed the reading of 60.96 is there to combat the movement in the near term as the negative divergence can be observed between the price and the RSI, making it prone to certain correction in the near term. We have valued the stock using the Price/Cash Flow per share based on relative valuation methodology and arrived at a target price of USD 53.69, and the current price of USD 60.66 seems overvalued at these levels.

Considering the movement in stock price, fading growth in profit margins, the rising cost of raw materials and wages makes a strong case for booking the stock at current levels with decent gains. Hence, we recommend a "Sell" rating on the stock at the price of USD 60.66, up 1.78% as of January 27, 2022, at 10: 45 AM ET

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

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