Welcome to the Stock of the Day!
For Coca-Cola (KO), sales have been flat in the U.S. while the company has contended with higher taxes and a tougher regulatory environment. So the stock has taken a beating lately.
At the same time, Coca-Cola has big plan for emerging markets. By investing billions in China, India and Russia, Coca-Cola aims to reach $200 billion in sales by 2020! Does Coke’s big bet on emerging markets signal that it’s time to buy?
With a whopping 17% market share, Coca-Cola Company is the undisputed king of soft drinks. In its 125-year history, the company has created 3,500 kinds of beverages, including Dasani, Fanta, Minute Maid and Nestea. The company has about 151,000 employees that serve 200 countries worldwide. This year, the analyst community expects that Coca-Cola’s sales will remain flat and earnings grow by 4%. Keep in mind, however, that the average Soft Drinks company is headed towards nearly 16% bottom-line growth.
Coca-Cola goes ex-dividend soon—November 27. Shareholders of record on December 2 will receive 28 cents per share on December 16. Now if there’s good thing about owning KO it’s that this stock yields 2.8%—one of the most generous dividends in the Soft Drinks industry. The Coca-Cola company has paid a quarterly dividend since 1920 and has hiked up its dividend for fifty years running.
This, plus the company’s ongoing $18.9 billion share repurchase program, suggests that Coca-Cola is committed to returning value to its shareholders. But while these may be a big bonus for value investors, as a growth investor I see owning KO as more trouble than it’s worth, and here’s why.
Within the Soft Drinks industry, Coca-Cola has to contend with the likes of PepsiCo (PEP). There’s no doubt that these are industry titans—Coke and Pepsi alone account for eight of the top 10 sodas. However, lately Pepsi has lost its stride to Coke, which accounts for not only the top soda spot, but also the No. 2 soda spot.
However, when it comes to Portfolio Grader, PEP is the clear overall winner. For starters, PEP enjoys stronger institutional buying pressure—a sign that the stock has a better risk-to-return ratio. And PepsiCo matches or beats out Coke on nearly every fundamental front. So PEP shares are currently a B-rated buy and is expected to outpace Coke in terms of sales and earnings growth this year and the next. Meanwhile, competitor Dr Pepper Snapple Group (DPS) is a C-rated hold. So I advise that you lay off on Coke and Dr Pepper shares for now.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. This stock has slipped over the past several months, falling from a buy in November to a C-rated hold during the final months of 2012, to most recently a D-rating.
What’s keeping this stock down is a combination of nonexistent buying pressure and mixed fundamentals. KO currently receives an D for its Quantitative Grade. And despite its position as a market leader, lately sales growth, operating margin growth, and earnings momentum have been slipping.
In fact, of the eight fundamental metrics I graded this stock on, five of them were C-rated and two were D-rated. The lone exception was return on equity, which was A-rated. So KO receives a C for its Fundamental Grade, placing it firmly in sell territory.
Bottom Line: As of this posting, I consider KO a D-rated Sell. While the company is making big moves in emerging markets like India, there’s simply too much near-term uncertainty to justify holding this stock.