Is Coca-Cola Stock Cheap?

Technology stocks in particular are under the microscope. Any signs of weakness have led to sell-offs with Meta’s sharp decline after beating earnings expectations the most obvious example.

That volatility has spurred some investors to seek shelter outside of the tech sector and companies with iconic brands and strong moats are popular harbors during headwinds. Few stocks are as tried-and-tested during boom and bust cycles as Coca-Cola (NYSE: KO).

The beverage company owns a stable of brands that encompass everything from sports drinks to its signature sugary soda. In spite of inflation and the pressure it has put on consumers, especially in lower-income brackets, Coca-Cola beat revenue and earnings estimates for the 1st quarter of 2024.

It hasn’t been enough to entice investors though, with KO share price down 3.9% over the past 12 months. The stock has also underperformed the S&P 500 over the past five years, returning 26.8% versus the benchmark’s 71%. But with increasing revenue, a host of established brands, a solid valuation, and a strong dividend, there is still a lot to like about Coke.

So, is Coca-Cola stock on sale now?

Remarkably, Coke Continues To Grow

KO share price sold off over the past year in spite of management’s reporting of earnings that beat analysts expectations.

Inflation appears to have been the chief concern among investors, followed closely by fears about the war in the Middle East.

Both of those factors have caused setbacks for big brands recently. McDonald’s, for instance, has faced boycotts over its perceived stance on Middle-East tensions. It also reported a pullback from lower-income customers who increasingly need to pinch pennies.

While investors have been concerned that Coke might suffer the same consequences, the beverage maker has been able to navigate both issues successfully so far. In the first quarter of 2024, Coca-Cola reported an increase in net revenue year-over-year of 3% and organic revenue growth of 11%.

Its $3.18 billion in net income was up 2.25% from last year. Diluted earnings per share was $0.72, 3.4% higher than the EPS expectation of $0.70 per share. The company’s $11.3 billion in revenue also beat expectations by 2.4%.

Unit case volume was flat in North America, but globally it increased by 1%. Coke has been tinkering with the formulas of some of its brands, including Sprite and Fanta. The changes to the Fanta line have been popular, and Coke’s sparkling soft drinks segment increased revenue by 2% in Q1.

Will Coca-Cola Stock Bounce Back?

The company is well-diversified beyond sodas, which makes the stock even more attractive to conservative-minded investors. Its juice, dairy, and plant-based division also experienced 2% growth in the first quarter. On the other hand, the company’s water, sports drinks, coffee, and tea division saw a revenue decline of 2% in Q1.

Investors appeared concerned by the quarterly decline in operating margin, down from 30.7% to 18.9% year-over-year. Coke attributed its reduced margins to acquisition costs, including a $760 million charge from the Bodyarmor sports drink brand acquisition and a $765 million charge from its Fairlife purchase.

Despite slimmer margins, Coca-Cola increased cash flows from operations from $368 million last year to $528 million in the first quarter.

On top of what was already a strong earnings release, Coke’s leadership announced it will be raising its full-year guidance for 2024. It now expects 8% to 9% organic growth, compared to previous guidance of 6% to 7%. It stuck with the full-year earnings growth estimate of between 4% and 5%.

Notably, Coke has raised prices in response to intense inflation and further announced that it will likely continue to do so through the remainder of the year.

What Do Analysts Say About Coke Stock?

Even if investors aren’t sold on Coke, Wall Street analysts are still in the company’s corner.

Out of 26 analysts who have rated KO, there isn’t a single Sell rating. 19 analysts consider Coke stock to be a Buy, and four forecast that the stock will outperform the market at large over the next 12 months.

The highest price target for KO is $74 per share, a 19.8% increase over where the stock currently trades.

The average price target is $66.88 per share, which translates to an 8.1% jump over the next 12 months. The low forecast, however, sees KO share price falling by 2.9% over the next 52 weeks.

Is Coke on Sale?

Wall Street is expecting respectable returns for Coke this year, and there certainly appears to be a case that the stock is undervalued.

Coca-Cola has a price-to-earnings ratio of 25x, which comes in marginally lower than staunch rival PepsiCo’s 26x P/E. 

One of the most important considerations for Coke investors, however, is the company’s dividend. Coca-Cola is a long-time dividend favorite, having increased its payout every year for the past 62 years. It has a strong annual dividend yield of 3.1%, and pays out $0.49 per share to KO holders quarterly.

The company increased its free cash flow to $158 million in Q1, which should ease any concerns that Coke could be unable to continue raising its dividend.

Is Coca Cola Stock Cheap?

Coca Cola appears cheap according to Wall Street analysis who have a consensus target price of $66.89 per share on it.

Coca-Cola might not capture investors’ attention like tech companies have, but it doesn’t have to. It’s a very stable, well-run company, that continues to increase its revenue, beat earnings, and pay dividends. These are among the many reasons why Coke has remained a big part of billionaire Warren Buffett’s portfolio for decades.

The stock has been sold off based on concerns about inflation and the war in the Middle East, but so far it has been able to find ways to grow the top line and boost cash flows. It is now trading at an attractive valuation for a company with such a strong moat, that also has a diversified group of brands across all beverage segments.

Especially if interest rates drop, KO’s yield could compensate for its lack of explosive gains.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.