Not There, Yet: What Level Makes The Coca-Cola Co Stock Interesting?

Amid all the recent earnings drama, The Coca-Cola Co (NYSE:KO) reported pretty good third-quarter numbers which beat on the top and bottom. But no one seems to really care, as is evident in KO stock’s flat performance in the past few months.

Instead, the market is focusing on struggling fast casual chain Chipotle Mexican Grill, Inc. (NYSE:CMG), which reported quarterly numbers that suggest that this is a story of a rebound that never happened. CMG stock dropped about 15%.The market is also focusing on hyper-growth chip maker Advanced Micro Devices, Inc. (NASDAQ:AMD), with quarterly numbers that suggest the growth story is maxing out. AMD stock dropped about 13%.

KO stock? Its essentially flat on the day on average volume.

There is a reason nobody really cares about KO earnings. The growth narrative is consistent and the stock isn’t all that exciting.

Consequently, I don’t think this is a stock to own, but if you must have exposure to the beverage industry, then Coca Cola stock is the one to buy.

KO Earnings Were Pretty Good

The quarter showed that Coca Cola is kicking butt in the beverage world.

PepsiCo, Inc. (NYSE:PEP) reported organic revenue growth of 1.7% last quarter. Snack volume growth was up 1%, but beverage volume growth was down 1%. Meanwhile, Dr Pepper Snapple Group Inc.(NYSE:DPS) reported organic revenue growth of less than 4% on flat case volume growth.

KO’s numbers are at the top-end of the spectrum. KO reported organic revenue growth of 4% on flat case volume growth.

Clearly, Coca Cola is doing something right. That “something right” is a focus on diversifying the beverage product line beyond the gradually eroding, core carbonated-beverage portfolio. Examples of this include Coca-Cola Zero Sugar, Topo Chico mineral water, and Suja juices.

Coca-Cola Zero Sugar experienced high-single digit case volume growth in the quarter. A reinvented recipe introduced midway through the quarter caused volume growth rates to double over the previous quarter. Meanwhile, Topo Chico, an ultra-popular premium sparkling mineral water brand KO acquired in early October, is expected to get a huge U.S. distribution boost over the next several quarters. Then there is Suja, the trendy organic juice brand which KO helped turned into a national sensation.

It also helps that Sprite is doing quite well, with unit case volumes growing in the mid single-digit range during the quarter.

Overall, KO is doing pretty well, and markedly better than its peers. And, if you’re looking for exposure to the beverage industry, then KO is the stock to own.

KO Stock Doesn’t Have A Compelling Valuation

But that doesn’t mean KO stock is really a good buy here.

It’s tough to pay 24x this year’s non-GAAP earnings estimate for what looks like mid single-digit growth over the next several years. This is especially true considering two things: traditional carbonated soda demand will likely remain weak into the foreseeable future; and, the S&P 500 Index is trading at a lower multiple (around 19.4x) for bigger growth expectations (about 11%).

Nonetheless, the market awards stability with a premium valuation, and that is exactly what is going on with KO stock. It’s always traded at a pretty big premium to growth. Earnings haven’t really gone anywhere over the past five years, and yet the market has till given KO stock a 25x price-to-earnings (GAAP) multiple on average during that time frame.

Still, a five-year average 25x multiple on what will likely be $1.50 in GAAP earnings per share next year implies a price target of about $37.50.

But that really isn’t how this stock trades. It trades on the dividend yield, which has a gradual long-term uptrend. As long as that dividend yield moves higher, so should KO stock.