Coca-Cola Stocks Review: Buy or Wait?

“Can I have a coke please?” This seems like a usual order we hear ourselves or from our friends when dining outside. What about investing in Coca-Cola stocks?  These days are all about the hypes of tech stocks. If it didn’t come across your radar, then perhaps you can consider to start tracking it on your watchlist.

No doubt that The Coca-Cola Company has created itself a moat for its brands of products. In fact, do you know that the company owns four of the world’s top five nonalcoholic sparkling soft drink brands? They are namely Coca-Cola, Diet Coke, Fanta and Sprite. Yes, the Fanta orange and Sprite are owned by them as well.

However, there are trends showing changing consumer preference. People are moving away from sugary sodas towards healthier alternatives. This may be a drag for its shareholders in the long run.

Well no barriers to entry can last forever for any business. The question is whether the company is investing and allocating resources to win in the future? And if that’s the case, should you buy Coca-Cola stocks today? Let’s check it out.

 

Business Overview Of Coca-Cola Stocks

Non-Alcoholic Beverage Market

The Coca-Cola Company owns or license more than 500 non-alcoholic beverage brands. They are grouped into the following 5 category clusters:

  • Sparkling soft drinks
  • Water, enhanced water and sports drinks
  • Juice, dairy and plant-based beverages
  • Tea and coffee
  • Energy drinks

Based on 2019, the sparkling soft drinks category represented 69% of their worldwide unit case volume. Trademark Coca-Cola itself accounted for 45% of the worldwide unit case volume.

Coca-Cola Stocks Revenue Composition

Source: Investor Overview – Updated for Third Quarter 2020

Operating Segments

However, the financial breakdown doesn’t go according to the above 5 category clusters. Rather the company segregate its business into 6 operating segments, namely based on its geographical operations:

  • Europe, Middle East and Africa
  • Latin America
  • North America
  • Asia Pacific
  • Global Ventures (To house acquisitions, brands and investments that the company feels can scale globally. The majority of the revenue is contributed by Costa coffee which the company closed its acquisition in January 2019)
  • Bottling Investments (The company’s interests in bottling partners. This is to help them maximize the strength and efficiency by leveraging on the Coca-Cola system)

Source: Investor Overview – Updated for Third Quarter 2020 / Data is for FY2019

A Closer Look At The Operating Segments

Let’s examine operating segments a little further. The regional contribution to the company’s top and bottom line are pretty even, except Global Ventures and Bottling Investments.

We will say that the Global Ventures segment acts as the innovation and experimental arm of the company. It houses the acquisitions of new brands and businesses that can potentially leverage on the Coca-Cola system. Therefore it contributes a comparatively smaller amount to the net revenues for now.

As for the Bottling Investments segment, you can see that it only makes up 19% of the net revenues contribution. But it only make up 3% of the total operating income. The business of bottling is a low margin and capital intensive one. In fact, the company has been refranchising its bottling operations for the past few years. The management wants to concentrate on its core concentrate business. It actually contributed about 50% of the company’s net revenues back in 2015.

Out of which, the company segmentize the business into namely the concentrate operation and finished product operation.

Source: The Coca-Cola Company Annual Report, Fiscal Year Ending 31 Dec 2019

The concentrate operations typically generate its revenues by selling concentrates, syrups to bottling partners. The latter will then combine these concentrates with sweeteners, still water or sparkling water, to produce finished beverages. They take up 55% of the net operating revenue. On the other hand, finished product operations take up 45% of the net operating revenue.

 

Coca-Cola Stocks Strategic Analysis 

Value Share Position

The Coca-Cola Company is a market leader across its non-alcoholic beverage categories, except the Energy category where it holds a number two position.

Source: Investor Overview – Updated for Third Quarter 2020

Definitely the company derives economies of scale from being a market leader. But more importantly, the beverage business is habit-forming in nature. Consumers will continue to buy the familiar brands of beverages whether in supermarkets or restaurants. In fact, the company spends a whopping $4 billion on marketing annually to maintain its brands.


Operating Profit Margin

The closest rival of The Coca-Cola Company is none other than PepsiCo, Inc. Although PepsiCo has higher revenue, its operating income is comparable to that of Coca-Cola. See below snapshots comparing the EBIT (Earnings Before Interest and Taxes) Margin of both companies. You can see that the operating profit margin of Coca-Cola is consistently higher at an average of 23%. On the other hand, operating profit margin of PepsiCo hovered around at a lower value of 14%.

The high profit margin maintained by Coca-Cola, together with its market leadership position among the non-alcoholic beverage categories they compete in, suggests the company has a strong competitive advantage in the marketplace.

Source: Stockrow / The Coca-Cola Company – EBIT Margin Trend Past 10 Years

Source: Stockrow / PepsiCo, Inc – EBIT Margin Trend Past 10 Years

 

Key Financials

Return On Invested Capital Of Coca-Cola Stocks

You can see the company’s return on invested capital (ROIC) for the past ten years indicated below, averaging about 15%. However, it has been trending lower in the recent years. This can be partially explained by the increase in invested capital brought about by increased debt.

Coca-Cola Stocks ROIC

Source: Stockrow / The Coca-Cola Company – ROIC Trend Past 10 Years

Return On Equity Of Coca-Cola Stocks

Similarly, the company’s return on equity (ROE) has been averaging more than 25% over the past 10 years. The exceptionally low value was in 2018, for fiscal year 2017. During which Coca-cola was affected by the Tax Reform Act. It is required to pay a one-time tax of $3.6 billion on historical offshore earnings that have not been repatriated to the US.

As this is a one-time net charge, we wouldn’t expect similar adverse financial impact moving forward. As you can see following that ROE returns to above 25% for fiscal year 2018 and 2019.

Coca-Cola Stocks ROE

Source: Stockrow / The Coca-Cola Company – ROE Trend Past 10 Years

 

Future Growth Of Coca-Cola Stocks

Since The Coca-Cola Company has very visible competitive advantages, it should be able maintain its growth in the future.

Organic Growth

The company has been experiencing 3 – 6% growth to its topline from organic revenues over the past few years. This is in line with the management’s long-term target of 4 – 6%. We believe given the strong barriers to entry, the organic growth target is very reasonable.

Source: Investor Overview – Updated for Third Quarter 2020

Growth From Strategic Investments

Understand that out of the 61 billion servings of all beverages consumed globally, only about 2 billion Coca-Cola products.

In fact, the pie that Coca-Cola aims to compete in is a $1.6 trillion market, which is still growing.

Source: Investor Overview – Updated for Third Quarter 2020

The company is committed to invest and expand its product lines and brands to bring more personalised beverages to consumers. This is shown by the recent recent acquisitions of Costa Coffee. It is a substantial step in building its coffee business.

Such strategic acquisitions or investments can leverage on the Coca-Cola system and create massive values for all stakeholders. The company’s network of bottlers and distribution system can help scale newly acquired brands or products globally.

 

Summing Up: Should You Buy Coca-Cola Stocks?

With its strong competitive advantage through its lines of brands, the company has created a durable moat around its business. Furthermore, we see a consistent and substantial amount of marketing expense to upkeep its brand value and maintain its stronghold. This is a positive signal that the management recognizes its competitive advantage.

You should definitely consider adding Coca-Cola stocks to your portfolio. The question is whether it is wise to purchase some now.

Well, for a starter, The company distributed dividends of $1.60 per share during FY2019. At a share price of $50 a share, it will translate to a 3.2% dividend yield. The company is committed to grow its dividend with a target of 75% Free Cash Flow payout over time.

As for share repurchase, the company management is also committed to attain net share repurchase over time. And they did repurchase back shares over the past ten years. This will continue to create value for shareholders in the long run.

Current Vs Past Values

Coca-Cola Stocks P/E Trend

Source: Stockrow / The Coca-Cola Company – P/E Trend Past 10 Years

The company has been trading at an average P/E ratio of about 20 – 30 historically. Notice the spike in FY2017 due to one time tax charge affecting its net income as discussed earlier. The company is fairly valued at the current P/E of 25. It may not be often for the share price of such a strong company to fall sharply. During Covid19 pandemic selloff in March 2020, the P/E did fall to about 18.5, but it quickly rebounded thereafter.

If you are looking for high-risk high-return kinds of stocks, then this might not be for you. But if you are looking for a great company that can not only withstand adverse economic events but also has long term value, you may consider adding some of Coca-Cola stocks to your portfolio. And add more when the next opportunity strikes!

Happy investing!

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