Insights

Coca-Cola beats expectations and remains resilient amid threats of inflation

While oil and gas and energy shares have been hogging the limelight recently, some bluechip stocks have also been scoring gains to keep investors happy.

One of the all-time favourites and a reliable performing stocks is Coca-Cola (NYSE: KO). The beverage giant recently reported a better-than-expected quarterly figure which impressed market analysts and sent the stock price higher by 1.06%, which is an all-time high.

Aside from its global brand recognition, Coke is also famous for being one of Warren Buffett’s stocks of choice. At the moment, Berkshire Hathaway (BRKB), the company led by Warren Buffett – is Coke’s largest shareholder with a more than 9% stake.

Not just a soda company

While Coca-Cola is well-known as a top soda (soft drinks) company, changing consumer demand over the years has forced the beverage giant to diversify its product lines.

As soda sales decreased over the years, Coke invested in healthier alternatives such as coffee, sparkling water, and sports drinks. Company records show that the beverage giant has expanded its portfolio to include over 4,700 beverage products and more than 500 brands.

Strong financials

Despite challenging market conditions and fluctuating consumer sentiment, Coca-Cola reported first-quarter earnings and sales that beat market forecasts. Sales surged 16% to US$10.5 billion, against Wall Street’s expectations of US$9.8 billion. Profits came at US$2.8 billion, or 64 cents a share. This is 24% up from a year ago, according to the company’s financial reports.

Some financial data

  • Topline revenue climbed 17% from 2020 to 2021
  • Overall revenue has increased by nearly 13% since 2018.
  • Net revenue from its bottling line of business also saw a nice boost, up 14% in the same time frame.
  • The company provided uplifting guidance for FY22 in its December report.
  • Organic revenue growth is expected at 7% – 8%
  • Free cash flow is expected to reach approximately US$10.5 billion
  • EPS growth of 5% – 6% for FY22

Streamlining operations and simplifying product lines

Coca-Cola is recognised as one of the top brands globally and has dominated the beverage market together with its close rival Pepsi.

Over the past two years, the company has been developing quirky new flavours — and eliminating some old favourites. Company executives said the product streamlining strategy is part of its efforts to remain relevant and attract younger consumers.

John Murphy, Coke chief financial officer told market analysts in a recent briefing, “When I look back on the past couple of years, one of the biggest outcomes has been that we used that time to clean out the cupboard. Now we are building it back up again.”

He added, “It’s important to stay disciplined and keep a close eye on brands that are performing well. We need to keep the portfolio pruned.”

So far, investors seem pleased with the strategy as Coke shares have gained 11% so far in 2022 —making it one of the better performers in the Dow, according to market analysts.

At the same time, traders have flocked to old and reliable companies like Coca-Cola because they offer sales and earnings stability at a time of geopolitical turmoil.

Based on a recent company statement, Coke said it continues to do well internationally even as the latest spike in Covid-19 cases is worrying investors.  The Latin American market remains a big contributor to sales with 34% while Europe, the Middle East and Africa account for 13% of sales.

What analysts are saying about Coca-Cola

Impressed by Coca-Cola’s strong performance, a market analyst said, “Coca-Cola showed how a seasoned management team can overcome just about any challenge you might throw at them. That’s long-lasting strength.”

The same analyst pointed out, “The quarter’s a reminder that sometimes you just want to own the best of breed companies in unassailable positions. It’s not that Coca-Cola’s got no problems — they’re dealing with the same issues as everyone else — it’s that they’ve been able to safely navigate their way through the thicket.”

In a recent comparison between Coke and Pepsi, Zacks Research said Coca-Cola shares have been much stronger, increasing nearly 12% in value and easily outpacing PepsiCo’s share return of 0.6%.

The analyst firm said however that Coke and Pepsi shares have primarily traded in line with one another over the last year, increasing by 24% and 22%, respectively.

Adjusting to inflation

As the company anticipates consumer demand to slow due to inflation, Coca Cola announced some tweaks to its packaging. The company will turn its focus on more affordable and refillable glass bottles in markets facing the biggest pinch from price increases including Latin America and Africa.

The move to refillable glasses is part of the company’s efforts to reduce costs from rising aluminium can prices to ingredients like sugar and labour and transport.

James Quincey, CEO of Coca Cola expects that inflation will impact the resilience in demand, which may fluctuate as inflation kicks higher in most economies in the world.

Quincey also said the goal of these initiatives is to reduce waste and give consumers financial incentives to use reusable bottles.

Technical Analysis: What the chart is saying about Coca-Cola

In the month between 21 February 2020 and 23 March 2020, the share price of Coca-Cola plummeted by more than 37% as the fear of COVID spread around the world.

However, investors were quick to brush off this anomaly and the stock had rebounded an impressive 30% in less than three weeks. Since that time, volatility has returned to more typical levels and the stock has resumed the long-term underlying upward trend.

After breaking to new all-time highs at the start of 2022, the stock built a band of consolidation broadly between support around US$58 and highs around US$63.

Steady gains have since seen the stock probing new highs above US$67. While near-term dips cannot be ruled out amid global market uncertainty, we favour viewing such moves as corrective while above the US$60 to US$58 region.

While holding above here, our focus remains on a further continuation of the upward trend to new record highs.

Outlook and conclusion

Despite fears of rising inflation across the globe that may affect consumer sentiment, Coca-Cola is in a strong position to continue to deliver good results to investors. The top management’s ability to adjust and remain flexible given challenging market conditions has proved to be successful, evidenced by the company’s most recent financial results.

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