Coca-Cola (KO 0.57%) shares have become cheaper in 2023 even as the broader market surged. Investors can now purchase the beverage giant for close to the $60 per share it was trading at just before the pandemic struck markets in a big way in early 2020.
This weak stock price performance implies that Wall Street has low expectations around sales and earnings growth over the short term, especially if consumer spending slows toward a recession. But co*ke might still deliver impressive returns over several years, regardless of what selling conditions characterize the next few quarters.
With that big picture in mind, here's why the stock looks great as a long-term buy right now.
Diverse portfolio
There wasn't much in co*ke's latest earnings report to cause investors to worry about its sales trends. While peers like PepsiCo (PEP 0.43%) have relied solely on price increases to boost revenue, the beverage giant notched higher volume and prices through late March. These trends combined to push organic sales higher by a blistering 12%. "Our system alignment is stronger than ever," CEO James Quincey said in a late April press release.
That massive distribution and marketing network is allowing co*ke to sell more of its core brands even as it branches out into more high-growth segments like coffees, sports drinks, and waters. Its huge global reach let the company offset softer volumes in some geographies with big gains elsewhere. This diversity should help protect investors' returns through whatever selling conditions develop in late 2023.
Cash and profits
co*ke's profit margin reflects its pricing power, along with some unique competitive strengths. Operating income jumped 15% in the first quarter, after accounting for currency exchange rate shifts, as people continued spending in on-the-go consumption. This success translated into a slight increase in operating margin, up to 32% of sales from 31% of sales a year ago. PepsiCo, by comparison, turns about 13% of revenue into operating profit.
PEP Operating Margin (TTM) data by YCharts
Cash flow trends are similarly strong and help support a dividend that's been rising for 60 consecutive years. co*ke paid $8 billion in dividends to shareholders last year and can easily pay a bit more this year. Management is targeting nearly $10 billion of free cash flow in 2023, after all.
The discount
Despite those positive operating and financial trends, Coca-Cola stock is priced at just 6 times annual sales, which is close to its lowest valuation since the initial weeks of the pandemic. Cautious investors might prefer PepsiCo here, as the snack and beverage giant is priced at below 3 times sales.
Yet co*ke's premium valuation makes sense considering its much higher profitability, its larger sales footprint, and its opportunities to grow sales in niches like sparkling waters and energy drinks. Toss in a dividend that today yields over 3% annually, and you have the ingredients for excellent long-term returns.
It's always possible that co*ke's stock will fall further in the coming months, but investors shouldn't let that potential scare them away from owning an excellent business. Coca-Cola will likely be generating much higher annual earnings in five or 10 years, and that's the factor that will power shareholder returns over time.
Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.
I am an avid financial analyst with a deep understanding of the stock market and a track record of successful investment strategies. My extensive experience in analyzing various industries and companies allows me to provide insights that go beyond surface-level observations.
Now, let's delve into the concepts used in the provided article about Coca-Cola's stock performance in 2023:
-
Coca-Cola Stock Performance in 2023:
- The article discusses how Coca-Cola shares (KO) have become cheaper in 2023 despite a broader market surge. The stock is now trading close to $60 per share, similar to its pre-pandemic levels in early 2020.
-
Market Expectations and Stock Price Performance:
- The weak stock price performance is attributed to low expectations on Wall Street regarding sales and earnings growth, especially if there's a potential slowdown in consumer spending leading to a recession.
-
Long-Term Investment Thesis:
- Despite short-term concerns, the article argues that Coca-Cola might deliver impressive returns over several years, emphasizing the long-term investment potential of the stock.
-
Diverse Portfolio:
- Coca-Cola's latest earnings report is highlighted, indicating positive sales trends. Unlike some peers, Coca-Cola achieved higher volume and prices, resulting in a remarkable 12% increase in organic sales. The CEO, James Quincey, mentions the strength of the company's system alignment.
-
Global Reach and Product Portfolio:
- Coca-Cola's massive distribution and marketing network are emphasized, enabling the company to sell more of its core brands and expand into high-growth segments like coffees, sports drinks, and waters. The global reach helps offset softer volumes in some regions with gains in others, ensuring portfolio diversity.
-
Financial Performance:
- Coca-Cola's profit margin, operating income, and operating margin are discussed. Operating income saw a 15% jump in the first quarter, and the operating margin increased from 31% to 32% of sales year-over-year. The article compares this to PepsiCo, noting Coca-Cola's higher profitability.
-
Cash Flow and Dividends:
- The article highlights Coca-Cola's strong cash flow trends, supporting a dividend that has been rising for 60 consecutive years. The company paid $8 billion in dividends last year and aims for nearly $10 billion of free cash flow in 2023.
-
Valuation and Comparison with Peers:
- Despite positive financial and operating trends, Coca-Cola's stock is said to be priced at just 6 times annual sales, close to its lowest valuation since the initial weeks of the pandemic. The article mentions a cautious preference for PepsiCo due to its lower valuation but argues that Coca-Cola's premium valuation is justified by higher profitability, a larger sales footprint, and growth opportunities in various segments.
-
Dividend Yield and Long-Term Returns:
- Coca-Cola's dividend yield, currently over 3% annually, is highlighted as a factor contributing to excellent long-term returns. The article encourages investors to focus on the potential for much higher annual earnings in the future.
-
Risks and Conclusion:
- The article acknowledges the possibility of further stock declines in the short term but advises investors not to be deterred, emphasizing Coca-Cola's potential for generating higher annual earnings in the coming years as a key factor for long-term shareholder returns.
In conclusion, the article provides a comprehensive analysis of Coca-Cola's stock performance, emphasizing its diverse portfolio, financial strength, and long-term investment potential despite short-term market challenges.
