Beverage giant The Coca-Cola Company (KO) announced its third-quarter results on October 24. The company’s earnings and revenue comprehensively beat Wall Street estimates. KO also raised its full-year guidance. However, the results were insufficient to drive the stock higher, as the stock has been up marginally since the earnings release.
In this piece, I have discussed why it could be prudent to wait for a better entry point in the stock.
KO comfortably beat the consensus EPS and revenue estimates in the third quarter. While its EPS came 6.5% above the analyst estimates, its revenue surpassed the consensus estimate by 4.3% during the third quarter.
The company continued its stellar earnings history, beating the consensus EPS estimate in each of the trailing four quarters. KO’s chairman and CEO, James Quincey, said, “We delivered an overall solid quarter and are raising our full-year topline and bottom-line guidance in light of our year-to-date performance.”
“Our leading portfolio of brands, coupled with an aligned and motivated system, positions us to win in the marketplace today while also laying the groundwork for the long term,” he added. KO’s cash flow from operations was $8.9 billion year-to-date, a rise of $861 million over the prior-year period. Its non-GAAP free cash flow rose $636 million over the prior-year period to $7.9 billion year-to-date.
The beverage giant raised its fiscal 2023 guidance for the second consecutive quarter. For fiscal 2023, KO expects to deliver organic revenue growth between 10% and 11%. It expects to generate a free cash flow of approximately $9.5 billion through cash flow from operations of approximately $11.4 billion, less capital expenditures of approximately $1.9 billion.
The company expects to deliver comparable currency-neutral (non-GAAP) EPS growth between 13% and 14%. Also, it expects comparable non-GAAP EPS growth of between 7% and 8%.
KO’s stock has gained 1.8% over the past month but declined 10.4% year-to-date to close the last trading session at $56.44.
Here’s what could influence KO’s performance in the upcoming months:
Robust Financials
KO’s net operating revenues for the third quarter ended September 29, 2023, increased 7.8% year-over-year to $11.91 billion. Its non-GAAP gross profit rose 10.2% over the prior-year quarter to $7.20 billion. The company’s non-GAAP operating income increased 8.5% year-over-year to $3.54 billion.
Its non-GAAP net income increased 6.6% year-over-year to $3.21 billion. In addition, its non-GAAP EPS came in at $0.74, representing an increase of 7.2% year-over-year.
Favorable Analyst Estimates
Analysts expect KO’s EPS for fiscal 2023 and 2024 is expected to increase 8.2% and 4.3% year-over-year to $2.68 and $2.80. Its fiscal 2023 and 2024 revenue is expected to increase 5.4% and 3.2% year-over-year to $45.37 billion and $46.84 billion.
Higher-Than-Industry Profitability
In terms of the trailing-12-month net income margin, KO’s 23.92% is 456.9% higher than the 4.30% industry average. Likewise, its 31.46% trailing-12-month EBITDA margin is 176.7% higher than the industry average of 11.37%. Furthermore, the stock’s 3.80% trailing-12-month Capex/Sales is 18.8% higher than the industry average of 3.19%.
Stretched Valuation
In terms of forward EV/EBITDA, KO’s 18.74x is 76.9% higher than the 10.60x industry average. Likewise, its 6x forward EV/Sales is 260.5% higher than the 1.66x industry average. Its 21.04x forward non-GAAP P/E is 24.5% higher than the 16.90x industry average.
Solid Historical Growth
KO’s revenue has grown at a 10.4% CAGR over the past three years and a 5.8% CAGR over the past five years. Its EBITDA has grown at a 7.8% CAGR over the past three years. Its net income and EPS have grown at 8.9% and 8.6% CAGRs over the past three years.
POWR Ratings Reflect Uncertainty
KO has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. KO has a B grade for Stability, consistent with its 0.60 beta. Its favorable analyst estimates justify its B grade for Sentiment.
It has a B grade for Quality, in sync with its high profitability. KO has a D grade for Value, consistent with its stretched valuation.
KO is ranked #15 out of 34 stocks in the Beverages industry. Click here to access KO’s Growth and Momentum ratings.
Bottom Line
KO’s revenue and earnings during the third quarter surpassed Wall Street expectations, comfortably driven by price increases and higher volumes. The company also raised its outlook for fiscal 2023.
The company expects pricing in developed markets to moderate in the fourth quarter as it cycles pricing initiatives from last year. Also, expectations of slower consumer spending and an overall uncertain macroeconomic environment mar the fiscal 2024 outlook. Moreover, the stock trades at an expensive valuation.
Considering these factors, investors should wait for a better entry point in the stock.
How Does The Coca-Cola Company (KO) Stack Up Against Its Peers?
KO has an overall POWR Rating of C, equating to a Neutral rating. You may check out the stocks within the Beverages industry possessing an A (Strong Buy) or B (Buy) rating: PepsiCo, Inc. (PEP), Suntory Beverage & Food Limited (STBFY), and Embotelladora Andina S.A. (AKO.B). To access more Buy-rated beverage stocks set to outperform, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
KO shares were trading at $56.96 per share on Thursday afternoon, up $0.52 (+0.92%). Year-to-date, KO has declined -8.36%, versus a 13.31% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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