Should You Buy Coca-Cola Stock? 3 Pros, 3 Cons (KO)

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Kudos to Coca-Cola (KO), and congratulations to owners of Coca-Cola stock, as the soda juggernaut topped sales and earnings estimates in its second quarter.

Should I Buy Coca-Cola Stock? 3 Pros, 3 ConsHowever, the report is over, and last quarter’s earnings once again mean little to the value of KO stock, as stock prices are always driven by where a company is plausibly going rather than where it’s been.

With that as the backdrop, and with second-quarter earnings in the rear view, what does the foreseeable future hold that could help or hurt the price of KO?

Here are the top things to think about from both sides of the table.

Coca-Cola Stock Pros

Higher Prices via Smaller Portions: While Coke did its fair share of cost-cutting last quarter, it’s impressive that KO was also able to raise prices at time when consumers are still conservative with their wallets. That being said, the higher price paid by consumers was on a per-ounce basis rather than on a per-drink basis. Coke found smaller containers to be a hit without a commensurate drop in price. Regardless, the fact that shoppers aren’t balking at the falling value in grocery aisles confirms Coca-Cola’s status as a premium brand worth paying up for.

Cost Cuts Galore: While the company lowered its cost enough to positively impact the per-share profits of Coca-Cola stock reported on Wednesday, shareholders haven’t seen anything yet. CEO Muhtar Kent aims to cut $3 billion worth of expenses by 2019. For perspective on how much that is, last year, Coca-Cola generated $7.1 billion in net income on $46 billion in sales.

Handling the Transition Well: The consumer migration away from carbonated beverages toward healthier choices, such as tea and water, continues to pose a threat to the value of Coca-Cola stock, as it takes the Georgia-born company out of its element and places it in uncharted territory. In spite of this, KO continues to thrive. While soda sales volumes fell in the second quarter, sales of ready-to-drink tea and bottled water more than offset the soda slide. Overall beverage volume was up 5% last quarter.

Coca-Cola Stock Cons

Unfavorable Exchange Rates: While net income may have been up 19% last quarter, it wasn’t because of a similar rise in sales. Revenue from its all-important overseas customers — about half of Coke’s business — was down significantly. Latin-American sales (by dollar) were off 13%, and were 9% lower in Europe. The reason? The sky-high value of the U.S. dollar. Owners of Coca-Cola stock dodged that bullet this time around because KO had put several other initiatives in place to mitigate the impact of adverse currency rates. But even Coca-Cola can’t outmaneuver this foreign exchange imbalance forever.

Valuation: Regardless of how well KO did last quarter, or will do in future quarters, the price of Coca-Cola stock is anything but cheap. The trailing price-to-earnings ratio of 23.5 and forward-looking P/E of 18.9 is more than extreme by any stretch of the imagination for a beverage company. It is conceivable, however, that Coca-Cola could grow into its valuation sooner or later, but it’s apt to be later. Per-share earnings are projected to only grow 6% next year on revenue growth of 2.5%.

The High Price of Cost Cuts: While investors generally cheer any corporate-wide effort to shrink spending, rarely do investors wonder which aspect of the business will be seeing less financial support. Maybe some of the current spending is on pointless items and efforts that will in no way harm the operation or sales. But sometimes, the true value of a division, service or item doesn’t become clear until after it’s gone. It is entirely possible Muhtar Kent may end up pulling some of the legs out from underneath KO. And that’s a risk that won’t become a liability until it’s too late.

Verdict

While the potential downsides are clear, that doesn’t take away from the fact that the upsides of Coca-Cola stock are present and sustainable.

The only downside that has teeth at this point is the valuation hurdle, but one good setback for KO in the near future could alleviate that problem in an instant, serving as an entry opportunity into an otherwise solid stock.

The currency burden isn’t likely to be permanent, as the U.S. dollar’s meteoric rise will self-correct sooner or later — even if it’s a rough landing.

In the meantime, the combination of all three pros are likely to lead the market to look at Coca-Cola stock with a glass-half-full point of view.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/coca-cola-stock-ko-pros-cons-coke/.

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