Insights

Is Coca-Cola Stock a Buy?

Coca-Cola (NYSE: KO) is an iconic company. Therefore, it is understandable that many investors would consider investing in the global beverage giant. However, while widespread consumer use of Coca-Cola products is a good sign, it does not always indicate the stock is a “buy.”

Let’s consider Coca-Cola’s prospects and recent results, and weigh them against its valuation to determine if its stock represents a buying opportunity now. 

Coca-Cola is thriving as the economy reopens

In its most recent quarter, which ended on July 1, Coca-Cola’s revenue increased by 12% from the same quarter the year before. The company has spent decades developing exclusive relationships with away-from-home destinations like restaurants. That’s paying off as the economic reopening is gaining momentum in most parts of the world.

Moreover, Coca-Cola is effectively grappling with inflationary forces by raising the prices of its products. Indeed, that was the primary reason Coca-Cola’s revenue expanded in the quarter ended in July. Impressively, consumption of the company’s products increased despite the higher prices. Even as inflation pinches household budgets, Coca-Cola products seem to be one thing they don’t want to replace.

KO Revenue (Annual) data by YCharts

In the last decade, Coca-Cola has experienced a compound annual revenue decline of 1.8%. The company is slowly adapting to changing consumer tastes, and that includes consuming slightly fewer sugary beverages. Still, despite the decrease in revenue, Coca-Cola has increased earnings per share at a compound annual rate of 2% in that same time.

While the company may benefit from solid revenue growth in the near term due to a rebound of away-from-home consumer spending, the longer-term trend will likely revert to the low single digits at best. 

Investors may want to wait before buying

KO Price to Free Cash Flow data by YCharts

Meanwhile, Coca-Cola’s stock is not especially cheap when measured by its price-to-earnings ratio of 26.5 and price-to-free cash flow ratio of 27. It’s trading at roughly its average valuation over the previous three years. Given that it’s not cheap and Coca-Cola is not very well aligned with changing consumer tastes, it would be prudent to wait for a lower valuation before purchasing Coca-Cola stock. 

Investors should look for a more significant margin of safety, which can be provided by a lower price, for the risk to Coca-Cola’s business. Sure, the company promotes and emphasizes non-sugary beverages like Diet Coke, Coke Zero, and others. However, a significant portion of the company’s revenue still comes from products containing high sugar. For those reasons, Coca-Cola stock does not seem like a buy right now

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.

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