Key points
- The Coca-Cola Company reported a solid quarter, outperforming PepsiCo, and provided favorable guidance.
- The stock was trading below analysts’ lowest price target, offering deep value for income investors.
- The 3% yield may not last long as this stock rises on analyst support and ratings.
- 5 stocks we prefer to Coca-Cola
The long-standing debate whether the Coca Cola Company NYSE: KO OR PepsiCo NASDAQ:PEP is the best stock going, but it looks like Coca Cola is the best buy today. The company’s fourth-quarter results echo details from PepsiCo, which point to strength in the beverage division offset by weaker results in the snacks sector. Because The Coca-Cola Company is a pure beverage play and sustains a higher level of organic growth, it will outperform in 2024. The question is how high the price of the consumer staples stock can go.
The KO stock market is at an inflection point. It is moving higher within a trading range and on track to break above it. Since the analysts’ lowest target is above the pre-release price action, upward revisions are expected now that the results are in, and the target range suggests a 90% chance the stock will get there, the KO shares will likely move higher. Pre-release consensus suggests KO stock will rise at least 10% while paying its 3% dividend with shares near $60.
The Coca-Cola Company leverages branding and strategy
The Coca-Cola Company reported a strong quarter, helped by its focus on brand and strategy. The company relies heavily on local bottlers to bring Coca-Cola’s message to target markets, and it’s working. Revenue grew 6.9% in the fourth quarter, driven by volume and pricing, beating the Marketbeat.com consensus by 150 basis points. The strength was due to a 2% increase in unit pack volume, a 3% increase in concentrate sales and a 9% increase in price/mix. Organic sales increased 12%, helped by a 1% benefit from an extra day.
Strength was reported across all segments, but was notable in all markets outside the United States. US sales increased 5%, while EMEA, Latin America and Asia Pacific grew by double digits to align with expectations of broad emerging market strength in 2024.
The margin news is good, but it’s not the catalyst for a rally in stock prices like it could have been. The company expanded its operating margin by 50 GAAP and 40 adjusted basis points to leave GAAP EPS down 2% year-over-year and adjusted earnings in line with consensus. Expected earnings are fine but, in this case, they are weak due to the strength of revenue, and forecasts are also not much of a catalyst.
The Coca-Cola Company expects organic growth to continue into 2024, but slow to 6-7%. Growth will be compromised by foreign exchange headwinds and divestments/restructurings, which will also impact profits. The company expects FXN earnings to rise 4% to 5% from the reported $2.69 for 2023, which is good but only as expected.
The Coca-Cola Company still represents a tasty dividend
The Coca-Cola Company represents a solid dividend payout for income investors, trading at a value level over the last few years at 22X earnings and yielding 3.1%. The payout ratio is almost 70% of its earnings, but the distribution is reliable and is expected to grow. The pace of growth in distribution is not high, but it is sustainable, given the outlook for earnings growth in 2024.
The price action in KO is advancing in pre-market trading following the release. The market is up about 0.75%, trading above the minimum threshold of $60 set by analysts. Assuming the market follows this signal, the price per KO should continue to rise in the coming sessions. The next resistance target is near $62.50 and could be reached quickly. If analysts start raising their targets (as they did for PepsiCo), this might not pose much resistance. However, if the market can sustain support above $60, KO stock could remain range-bound through the end of the year.
Before you consider Coca-Cola, you’ll want to hear this.
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