Over the last few decades, financial advisors, who don’t agree on much, have routinely advised investors to buy The Coca-Cola Co (NYSE:KO). After all, the world’s largest soda company is a favorite of the legendary money manager Warren Buffett and it is a “dividend aristocrat” with regular payouts dating back more than five decades. Times have changed KO stock though.
Per-capita, soda consumption is at a multi-decade low and shows no signs of rebounding. Although Coca-Cola continues to dominate the market for carbonated beverages, Wall Street clearly prefers rival PepsiCo, Inc. (NYSE:PEP), which has gained more than 7.6% this year, nearly double the 3.6% gain in KO stock.
Atlanta-based Coca-Cola recently reported mixed quarterly earnings, sending shares slumping. With that in mind, let’s take a closer look to see if there is any fizz left in KO stock.
Three KO Stock Pros
Cutting Costs
Coca-Cola is ratcheting up a 2015 plan to cut $3 billion by 2019 by trimming 1,200 workers from its corporate staff for an additional $800 million in savings. Refranchising its bottling business is a smart move that will pay off over the long run though it is causing a drop off in revenue.
Improved Earnings
The company lifted the lower end of KO’s 2017 earnings outlook. Now it expects adjusted EPS to drop 1% to 3%, an improvement from a 1% to 4% fall that it previously expected. Margins expanded by 90 basis points during the quarter, which was a pleasant surprise.
New CEO
James Quincey, who takes over as CEO of the Atlanta-based company next week, will benefit from increased sales of smaller size soda portions and will continue to push lower calorie products like the well-received Coke Zero Sugar. During the most recent quarter, KO has gained share in soft drinks, juice, dairy, tea, coffee and plant-based beverages.
Three KO Stock Cons
Soda Sales
The soda industry tried and failed to stop the implementation of soda taxes in Philadelphia and Berkeley, California. Other cash-strapped state and local governments are bound to follow and Billionaire Mike Bloomberg’s philanthropic arm will continue to push the issue. Sales of soda have fallen in Philadelphia at a much steeper rate than officials had expected, though collections are expected to meet targets.
Health Issues
It’s hard to underestimate the challenge KO stock faces with its core product. Health studies have shown that drinking soda is responsible for a litany of woes ranging from obesity to dental problems. Unit case volumes in North America, the company’s largest market, were flat during the most recent quarter. Even Diet Coke, which had been considered a potential savior of Coca-Cola at one time, reported a decline. Activist groups such as the Center for Science and the Public Interest have argued that diet sodas should be avoided as well.
Fundamentals
In a rising interest rate environment, Coca-Cola’s 3.4% dividend yield is less attractive to investors though there is no danger of it being cut. Moreover, KO stock is trading a sky-high multiple of 29, especially since Wall Street doesn’t see revenue growth returning anytime soon. The stock price also is trading near its average 52-week target price of $44.36. The odds of it “popping” are slim to none.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.
