The Coca-Cola Co (NYSE:KO) will put a rough 2014 behind it when it reports fourth-quarter results Tuesday, but that won’t be the end of its troubles. The core issue is that soda consumption continues to shrink, taking KO stock upside with it.
Sales of carbonated beverages have been a slowly melting iceberg for years now as more health-conscious consumers increasingly shun drinks made with sugar, corn syrup or artificial sweetener.
There is indeed growth to be found in the beverage business, but it’s in bottled water, sports and energy drinks, fruit drinks and bottled teas. Although KO has established footholds in these alternative markets with sizable stakes in Monster Beverage (NASDAQ:MNST) and Keurig Green Mountain Coffee Roasters (NASDAQ:CMGR), its fortunes still lie with fizzy drinks.
That’s why Wall Street analysts expect KO to post another quarter of lower earnings and revenue. Analysts, on average, forecast KO to report fourth-quarter earnings of 42 cents a share, down from 46 cents a share last year, according to a survey by Thomson Reuters. Revenue is projected to fall 2.5% to just under $10.8 billion.
KO stock has now lagged the broader market for three consecutive years, and it’s not clear management has the goods to reverse sentiment on the name. Indeed, KO’s biggest strategic push these days is an extensive cost-cutting program.
A restructuring program is all well and good, but KO has never been known for expense reduction, so forgive the market if it remains skeptical about the efficacy of such moves. Furthermore, the company’s $3 billion restructuring program won’t be completed until 2019.
In the meantime, earnings per share are expected to continue to decline. Analysts expect next fiscal year’s EPS to slip to $2.02 from $2.03.
KO Stock, the Market Laggard
As for the quarter just wrapped, analysts will likely key on pricing and marketing strategies for 2015. Indeed, KO stock received a rare upgrade to overweight (buy, essentially) from Morgan Stanley based in part on a return to “rational” pricing. KO has been cutting prices on 12-packs and two-liter bottles of soda — although that boosts volumes, it hurts profitability.
As for marketing, KO is looking to regain some lost market share this year, and the Street will want any facts and color it can get on the beverage-maker’s progress.
One argument in KO’s favor is that all the bad news is already baked into the KO stock price, but that’s tough to believe looking at the price-to-earnings multiple. KO stock currently trades at 21 times forward earnings. That’s significantly more expensive than the broader market. It’s also hard to defend in light of KO’s long-term growth forecast, which stands at less than 4%.
Interestingly, the technicals on KO stock remain healthy. Shares are in a long uptrend according to the 200-day moving average, and KO stock reliably finds support at its 50-day moving average.
But just because the technicals suggest more gains for KO, that doesn’t mean there won’t be steep opportunity costs. KO stock has underperformed the broader market annually for three straight quarters now. Over the last five years, KO is up only about 55% versus a 90% gain for the S&P 500.
It’s hard to see KO returning to its market-beating ways in 2015. Although it remains a true long-term holding — hey, it’s good enough for Warren Buffett — there’s no reason to allocate fresh capital to KO stock now.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
