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Coca-Cola Consolidated Is a Great Defensive Play in a Volatile 2022

Coca-Cola Consolidated (NASDAQ:COKE) produces and engages in the marketing, and distribution of nonalcoholic beverages. It is the is the largest independent Coca-Cola bottler in the United States. COKE stock has losses of nearly 21% in 2022 which means that it now represents an attractive investment opportunity.

Coca-Cola Consolidated sign outside of their building. COKE Stock.
Source: Jonathan Weiss / Shutterstock

The good news is that hopefully the war in Ukraine will end soon and geopolitical risks will fade away. Also of note, the rising interest rates in the U.S. have only just started their cycle so it is a good idea to think about rebalancing your entire portfolio and think about how to protect from additional stock market volatility.

Let’s get into the three main reasons why COKE stock is a good buy right now.

COKE Stock Is a Defensive Sector Play

Coca-Cola Consolidated operates in the Consumer Defensive sector. If the Federal Reserve implements a tighter than expected monetary policy in 2022 dependent on the path of inflation chances are the stock market will continue to be highly volatile with selloffs and rallies.

Beverages are goods that people tend to buy regardless of economic conditions. In 2021 investors rushed to support stocks mostly in the technology sector. Things have radically changed in 2022 and defensive sectors like Utilities, Consumer Staples, and Health Care are gaining momentum. It is not a good idea to pick COKE stock solely because of its sector, but in stock investing the concept of “connecting the dots” as Steve Jobs said is crucial. The first dot is the rotation of capital into defensive sectors.

A Strong FY 2021 Is Another Positive Element

The second dot to connect in the decision to invest in COKE stock is a stellar full-year 2021 financial performance. On Feb. 22, 2022, the date of the earnings announcement the stock had a closing price of $583.64. The following day a steep selloff sent the stock lower by nearly 24% closing at $446.66. Why this happened seems tough to explain.

Especially if you consider that the company showed positive key metrics for the full year like a “record revenue, income from operations and operating cash flow” as Chairman and CEO J. Frank Harrison III stated.

For the fourth quarter 2021 Coca-Cola Consolidated reported a year-over-year increase of 9.7% in net sales to $1,402.3 million, a 6.7% increase in gross profit, and a 6.9% decline in income from operations to $87.1 million.

The best explanation for the selloff was the large decline in quarterly net income: -72.28% to $19.11 million when compared to a net income of $68.93 million in the third quarter of 2021. This is not a positive factor but for the full year, the firm had a very strong performance which mitigates the decline of net income in Q4 2021.

In 2021 net sales increased 11.1%, gross profit increased 10.5% and income from operations grew 40.1% to $439.2 million. Net income increased 9.91% to $189.58 million.

Free cash flow grew 25.18% in 2021 to $366.06 million, a key metric at which Coca-Cola Consolidated shines. In the past three consecutive years as it has increased positive free cash flow generation.

A Broader Financial Performance Improvement

Not all things are perfect for COKE stock, for sure the company has a high level of debt. The company has a debt to equity (D/E) ratio of 1.28 as per the latest quarter. However, the debt is well covered by the operating cash flow and interest coverage does not pose any problem.

Coca-Cola Consolidated has improved in 2021 key metrics like operating margin, and return on invested capital. The company has also increased its efficiency ratios like fixed assets turnover and asset turnover. Finally, it has a high return on equity of 30.96% and has lowered its long-term debt.

These combined positive aspects outweigh the negative ones and make COKE stock an interesting defensive stock in 2022. Many times, being on the defensive side makes complete sense. Now, this is one of those times.

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.


Article printed from InvestorPlace Media, https://investorplace.com/2022/03/coke-stock-is-a-great-defensive-play-in-a-volatile-2022/.

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