Over the last few months, much of the commentary we’ve been seeing on market media and among analyst reports have revolved around the “reopening” theme – what stocks you should focus on as business and economic activity starts to shows signs of coming back from the long, pandemic-driven drop we all had to deal with in 2020. Even now, with infections from the Delta variant pushing hospitalizations back up in various parts of the U.S. and local governments begin reimposing some guidelines, most of the focus from the markets remains on the way that economic activity will continue to increase.
There are some positive signs, to be sure – yesterday’s earnings announcement from Boeing (BA), for example showed a clear increase in demand for jet airlines that so far seems to match indications that travel demand is starting to come back. Even so, I think there remains enough risk – not only related to the pandemic, but also simply from the still-very-extended state of the broad market, and the increasing pace of economic activity that at some point has to shift in the opposite direction – that it’s smart to keep thinking about conservative, defensive-minded ways to keep your money working for you.
A good way to start making your investments more conservative is by reducing large positions that you might have been holding for extended periods of time – especially if you have unrealized gains in stocks in normally cyclical industries like the Technology or Industrial sectors. Locking in some gains now can free up cash to start looking for new, more conservative positions in stocks with less sensitivity to economic cycles, and stable, established revenue streams. Food stocks have always been an area I gravitate to that fits this description, and that includes some of the biggest names in the Beverages industry.
Coca-Cola Co (KO) is one of the most recognized brand names in the entire world. They’re so ubiquitous, in fact that for many the word “Coke” doesn’t actually refer to Coca-Cola itself, but to soda in general. That is just one of the reasons that I think KO Is an example of a company that is less sensitive to economic risk, even on a global scale, than many other stocks in the marketplace. Another reason is that, even when the economy turns sour, consumers not only still have to buy food, but they have also proven that there are “indulgences” that they won’t do without. Soda is one of them, and that is why I think the largest stocks in the Beverages industry could be a smart place to think about putting your money to work even as the market remains uncertain and unpredictable. KO also occupies an interesting place in its market, as its positioning as the soft drink maker of choice among most restaurants, theaters, and other venues that are starting to see rebounding demand could give it an extra headwind for as long as economic activity continues to strengthen.
Safety is one thing; value is another. The fact is that from a low at around $46 a year ago, KO has moved into an impressive upward trend, increasing in value by a little under 18% since then. The company boasts a balance sheet that, not surprisingly, has held up and remained a source of strength throughout the past year and a half. Does that mean that KO could be a smart bet, both from a fundamental and value perspective, or has the stock’s increase in price outpaced its improving fundamental metrics? Let’s dive in.
Fundamental and Value Profile
The Coca-Cola Company is a beverage company. The Company owns or licenses and markets non-alcoholic beverage brands, primarily sparkling beverages and a range of still beverages, such as waters, flavored waters and enhanced waters, juices and juice drinks, ready-to-drink teas and coffees, sports drinks, dairy and energy drinks. The Company’s segments include Europe, Middle East and Africa; Latin America; North America; Asia Pacific; Bottling Investments, and Corporate. The Company owns and markets a range of non-alcoholic sparkling beverage brands, including Coca-Cola, Diet Coke, Fanta and Sprite. The Company owns or licenses and markets over 500 non-alcoholic beverage brands. The Company markets, manufactures and sells beverage concentrates, which are referred to as beverage bases, and syrups, including fountain syrups, and finished sparkling and still beverages. KO has a current market cap of $244.9 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by almost 62%, while sales improved about 41.5%. In the last quarter, earnings increased by about 23.6% while sales grew 12.29%. KO operates with a very healthy margin profile that strengthened in the last quarter; in the last twelve months, Net Income was 22.19% of Revenues and declined to 26.07% in the last quarter.
Free Cash Flow: KO’s Free Cash Flow is healthy, and has been improving steadily over the past year. Over the last twelve months, the company generated cash flow of $9.9 billion. That marks an improvement from last summer, when Free Cash Flow was about $7.5 billion. The current Free Cash Flow translates to a Free Cash Flow Yield of 4.72% at the stock’s current price.
Debt to Equity: KO has a debt/equity ratio of 1.64, which is a bit high, but not unusual for stocks in the Beverages industry. It is worth noting that in late 2019, this number was 1.44, which is indicative of a measurable increase in long-term debt. Their balance sheet shows $13 billion in cash and liquid assets versus $39.8 billion in long-term debt. Cash has increased since the third quarter of 2020, from $10.9 billion to $13 billion in the last quarter. Their operating profile and balance sheet together indicate that KO should have no trouble servicing its debt.
Dividend: KO pays an annual dividend of $1.68 per share, which at its current price translates to a dividend yield of about 3.05%. KO is considered a “Dividend King;” they increased their dividend in 2020 from $1.60 and again at the end of the first quarter of this year, marking 59 consecutive years of dividend increases. KO has paid a consistent dividend since 1920 and are a member of the S&P Dividend Aristocrats Index.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $54 per share. That suggest that KO is slightly overvalued, by about -4% from its current price, with a useful discount at around $44.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays the past year of price activity for KO. The red line traces the stock’s upward trend, from a low a year ago at $46 to its recent peak in the last week or so at around $57.50. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock had retraced in June, and touched near to the 38.2% retracement line before turning back upward, and rallying strongly from that point. Current support is around $56 based on a pivot high in early June, with immediate resistance at the stock’s $57.50 peak. A drop below $56 should have limited downside to next support at around $55 based on pivot activity on multiple occasions at that level. A push push above $57.50, on the other hand should have room to move to at least $59 – the distance between current support and immediate resistance – and possibly into the low-$60 range if bullish momentum increases.
Near-term Keys: From a long-term perspective, there really isn’t any way to think of KO as a bargain at its current price. That said, I think there could be some interesting opportunities to take advantage of changes in the stock’s current momentum and trading range with short-term trading strategies. A break above $56 could be an interesting opportunity to take advantage of buying the stock or working with call options with a short-term eye on $57.50 as an exit point. Practically speaking the stock would need to drop below $55 to offer a useful bearish signal; in that case, you could consider shorting the stock or buying put options with an eye on the $53 level around the 38.2% retracement line offering a reasonable, quick-hit profit target on a bearish trade.