Is Coca Cola Stock Undervalued?

Coca-Cola Co (NYSE:KO) was flying high at the beginning of 2020, but the coronavirus pandemic changed everything.

The pandemic kicked off panic shopping that focused on the essentials – toilet paper, antiviral cleaning supplies, and food staples. Coke’s range of sodas, juices, and bottled waters took a hit, and that made it difficult for the company’s market cap to return to its pre-Covid levels.

The lower price has some analysts wondering – is Coca Cola stock undervalued?

The company is showing a spike in sales that may signal consumer spending habits are returning to normal. Despite lowing revenue, it outperformed analyst estimates for most of the year.

Even with sales dropping on all sides, the company is still profitable, and it has a massive global distribution network underlined by strong brand recognition.

This is because management pushed aggressive cost-cutting efforts to meet the changing market. This included reevaluating some of its smaller brands while focusing on the path to recovery.

Let’s jump right in to find out if the company’s future prospects are as refreshing as its product line.

Why Coca Cola Stock Is Down

Several factors hit Coca Cola during the coronavirus pandemic, but to fully understand it, you need to know its revenue sources.

Much of the company’s revenue comes from selling concentrated syrups wholesale to regional bottling facilities, which largely operate as franchises. It also owns the Bottling Investments Group (BIG), which provides support for the businesses in its franchise network.

This accounts for approximately two thirds of the company’s revenues and includes concentrates sold to restaurants, convenience stores, and other businesses.

Finished products, which are also sold wholesale to retailers and distributors, make up the remaining third. These are the people who ultimately stock vending machines and store shelves with the product.

The pandemic created several problems for the company. You likely noticed how well-stocked sodas were in nearly empty grocery stores. It wasn’t because people weren’t buying, as the company still generated plenty of revenue from retail sales. The company just has a great supply chain.

Restaurant closures, however, caused a major hit to sales. Even when they reopened, customers weren’t getting the same free refills they used to, and this dinged sales too. In addition, sales in live arenas, universities, and other public places stalled as they were all shut down.

But the company’s financials tell the full story.

Coca Cola Financials Remain Impressive

Coca Cola’s revenue from net sales for the second quarter of 2020 was $7.2 billion. It squeezed $1.78 billion in profit from this, which comes out to $0.42 cents earnings per share.

This is a decline from the same quarter of the previous year, in which the company posted $2.61 billion income, or $0.61 per share.

Global unit case volume shrank by 25 percent in April, 10 percent in June, and 6 percent in July. This shows vast improvement for the company’s outlook moving forward.

Its core sparkling soft drinks business dropped by 12 percent for the quarter, but the biggest drops were in tea and coffee (31 percent), sports drinks (24 percent), and juice/dairy/plant-based beverages (20 percent).

Still the company has $19.8 billion in cash on hand, along with $3.85 billion in receivables due in the next year. This is compared to $26.8 billion in liabilities with another $48.7 billion coming due soon.

It’s not all bad news though – the company had a healthy revenue increase in its Fairlife milk and Simply juice brands.

It also paused its social media marketing spend amid the Facebook advertising boycott (although the company never officially joined the movement).

Smaller brands, like Odwalla juice, were discontinued from its portfolio to focus on those with more profits. Coke management are heavily focused on its supply chain to ensure it maximizes profit opportunities as the economy struggles.

Is Coca Cola Valuation Too Low?

Coca Cola’s stock price took a massive hit from the coronavirus pandemic, dropping from a 52-week high of $60.13 to a low of $36.27, and it’s hovering in the $50 range.

KO share price is heavily reliant on a small portion of its nearly 400 portfolio products, and the company’s relationship with distributors is what ultimately keeps it afloat.

Sales are rebounding, even with profitability and free cash flow falling. The company’s battling all this with its aggressive cost-cutting measures.

Its global distributors also have strong investments in technology to improve efficiency throughout the entire supply chain.

Coca Cola’s distribution and supply chain is a force to be reckoned with in the ultra-competitive non-alcoholic drink categories it’s in.

The company also pays $0.41 quarterly dividends, for a total of $1.64 annual yield. While it may not be a massive growth stock, the company’s over-$200 billion market cap is quite the markup on its $8 billion annual profits.

Will Coca Cola Stock Rise?

Coca Cola stock has been turbulent on a macro level, but overall, it’s relatively steady. It always traded in the $20-$60 range, and it’s already in the high end of that range.

The company isn’t a growth stock – it’s the biggest beverage company in the world, and the economy is heading in a direction that’ll put a squeeze on Coca Cola’s sales volume sooner or later.

It’s very likely to continue pivoting into healthier revenue streams, and it needs its accounts receivable to continue coming through to pay its debt. It could find itself running into issues, but it has plenty of liquidity to pay its way out. If it rises in the next two years, it’s not likely to outperform the general market.

Is Coca Cola Stock Undervalued? The Bottom Line

Coca Cola is the biggest beverage company in the world, and it operates largely on a franchise model. The coronavirus shut down man of its biggest customers in stadiums, universities, event centers, and restaurants.

However, as soon as things reopened, the company was able to start increasing profits. It’s still paying a dividend through the end of 2020, and it’s making aggressive moves to remain nimble during rough times.

Still, the company’s growth prospects are limited, as it already has a massive global distribution network. It’s also operating in a highly competitive market. This means it’s going to experience price volatility over the next two years. Invest with caution.

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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.