Shares of global beverage giant Coca-Cola (NYSE:KO) popped to new highs in late January 2020 off strong fourth quarter numbers implying that the company’s growth strategy of coupling product innovations and brand acquisitions has paid off.
Investors should get used to this dynamic. It’s not going away any time soon.
Over the next several quarters, Coca-Cola’s growth trends will remain favorable, supported by a strong global consumer spending backdrop, a rebound in the trademark Coke brand and sustained growth in the company’s portfolio of tea, sparkling water, juice, and energy drinks.
These favorable growth trends will enable the global beverage giant to report strong quarter after strong quarter, and the sum of these quarters will keep Coca-Cola stock on an uptrend. Big picture — this stock will keep grinding higher.
Will it run up to $70 overnight? No. This isn’t that type of stock. But it should inch towards $65 over the next few months. That upside potential, coupled with a big yield, make the stock worth a look for risk-adverse investors.
Coca-Cola Has Found a Winning Recipe
Coca-Cola has found a fairly simple winning recipe:
- Innovate within core product lines to consistently energize consumer interest in those core products.
- Leverage a world’s worth of beverage consumption data to identify up-and-coming beverage consumption trends.
- Act on that data, acquire brands that perfectly align with those trends, and give those brands global distribution.
- Turn these acquired brands into core product lines, and go back to step 1.
It’s a fairly simple process which has allowed Coca-Cola to retain dominance in the global non-alcoholic beverage market for years. This process should continue to power strong results throughout 2020, aided by a few noteworthy catalysts.
First, global consumer spending trends should improve in 2020. Yes, I understand there’s the whole coronavirus outbreak in China. But epidemics of this nature are not unprecedented, usually only last a few months and don’t typically impact consumers all that much outside of the outbreak’s epicenter. Beyond that, labor markets globally remain healthy, interest rates remain at or near record lows, and central banks everywhere are injecting liquidity via asset purchases. Those are strong fundamentals to support a rise in consumer spend in 2020.
Second, the trademark Coke brand is rebounding. The Coke brand has reported back-to-back years of positive volume growth thanks to product innovations (such as small cans and new lines like Coke Energy) and a consumption shift back to sodas (U.S. soda consumption rates are rebounding, thanks to branding changes).
Third, Coca-Cola’s portfolio of tea, juice, sparking water, and energy drink brands is still growing very quickly. So long as consumption trends continue to favor adoption of these soft drink alternatives, Coca-Cola should sustain big growth in this vertical.
KO Can Run Higher
Coca-Cola stock has pushed to all time highs in early 2020. The stock will likely keep making new highs throughout the year.
Here’s the math. The global non-alcoholic beverage market has been and will likely remain a 4% to 5% growth market, with steady demand increases supported by the fact that consumers want/need to drink is unwavering. In that market, Coca-Cola should retain dominance. Indeed, they should expand dominance thanks to rebounding soda consumption trends and the company’s additive acquisition strategy.
Reasonably speaking, then, Coca-Cola projects as 5% revenue grower over the next few years. Profit margins should improve with strong demand and productivity improvements. Share buybacks will also remain a big player here.
Net net, you’re talking about high single-digit profit growth potential here, per year, over the next several years. Assuming so, $3.50 in earnings per share seems entirely doable for the company by fiscal 2025. Based on a 25-times forward earnings — which is average for soft drink companies — that implies a 2024 price target for the stock of nearly $90.
Discounted back by 7% per year — 3 points below my normal 10% discount rate to account for the yield — that equates to a 2020 price target of over $65.
The Bottom Line on Coca-Cola Stock
Coca-Cola has found a winning recipe, in market that will continue to expand in 2020. Consequently, the company will sustain strong growth over the next few quarters. This sustained strong growth will keep Coca-Cola stock on a healthy uptrend.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.