Company Overview: The Coca-Cola Company (NYSE: KO) is a beverage company, which is engaged in owning, licensing, and marketing beverage brands, mainly sparkling beverages and a range of still beverages, for examples waters, flavoured waters, juices, ready to drink teas and coffees, sports drinks, and energy drinks. The company sells products in more than 200 countries and territories with more than 700,000 people, assisting in enhancing economic opportunity to local communities worldwide.

KO Details

KO Rides on Higher Investments & Cost Cutting Initiatives: The Coca-Cola Company (NYSE: KO) is a beverage company that has a portfolio of more than 500 brands and is available across 200 countries and territories. Despite the headwinds caused by the coronavirus pandemic, KO remains on track to be resilient in the recent months, thanks to its endeavours to restructure portfolio and accelerate investments to increase its digital existence due to the shift in consumer choices. The company has been in profit from the successful implementation of plans and policies to grow as a consumer-centric total beverage company. Notably, the company expects to gain winning momentum in FY21, owing to its recent innovations.

The company has witnessed a splurge in e-commerce, owing to the shift in consumer preferences, which led to doubling of channel growth rate in many countries, during the pandemic. In reaction, the company has taken out measures to invest higher to strengthen its presence in this channel as compared with the pre-crisis period. The company has also invested in e-commerce in North America to assist retailers and meal delivery services, which has been shifted toward fit-for-purpose package sizes for online sales. The company is also boosting consumer connections via fulfillment methods, be it B2B to home or B2C platforms in several countries, with a view to secure online demand for at-home intake. The company’s emphasis on accelerating development in digital space is likely to be viable, placing it for long-term growth.

For the financial year ended on 31 December 2019, net operating revenues stood at $37,266 million as compared to $34,300 million reported in FY18. Looking at the past performance, KO delivered a CAGR growth of ~5.1% in net income over the period of FY15 to FY19. The company was successful in reducing its long-term debt to $27,516 million reported at the end of FY19 from $28,311 million from the end of FY15.

Past Performance (Source: Company Reports)

It is worth mentioning that the COVID-19 led pandemic has hit all segments hard, including the beverage industry. KO is among the beverage companies that have been aiming at restructuring to come out stronger from the losses suffered due to the shutting down of the global economy. The company intends to slash ~2,200 jobs worldwide, including 1,200 in the United States, primarily in reaction to the above-mentioned business closures and remains on track to reduce its overall costs. The company intends to utilize these cost-saving synergies to provide flexibility and support investments in its growing brands.

3QFY20 Operational Highlights: KO declared its 3QFY20 results, wherein the company reported revenue of $8,652 million, down 9% on y-o-y basis. Organic revenues were down 6% as compared to the prior corresponding period. In the reported quarter, the company’s revenues were negatively impacted, owing to headwinds in the away-from-home channels, which represents approximately half of its total revenues. During the quarter, the company reported comparable earnings of 55 cents per share, which declined 2% on pcp. Currency translations adversely impacted earnings by 7%, during the quarter. Comparable currency-neutral operating income increased by 7% on a year over year basis, owing to efficient cost-management programs across all operations. Comparable operating margin in 3QFY20 came in at 30.4%, up from 28.1% reported in the year-ago period.

3QFY20 Key Results (Source: Company Reports) 

Segmental Details: In 3QFY20, revenues from North America declined 2%, while that from Latin America decreased by 23%. In the meantime, revenues from Asia Pacific and EMEA declined 9% and 7%, respectively. Organic revenues from Latin America, North America, the Asia Pacific, EMEA, Global Ventures segments and Bottling Investments declined 4%, 3%, 8%, 6%, 20% and 6%, respectively.

3QFY20 Segmental Results (Source: Company Reports)

Balance Sheet & Liquidity Position: The company exited the quarter with cash and cash equivalents of $11,385 million, and long-term debt of $39,502 million. Non-GAAP free cash flow for the nine months ended 25 September 2020, came in at $5,461 million, whereas operating cash flow came in at $6,220 million. EBITDA Margin for 3QFY20 stood at 31.2%, higher than the industry median of 20.9%. Current ratio came in at 1.13x in 3QFY20, higher than the previous corresponding figure of 0.92x. Debt to equity for the same time span stood at 2.84x, lower than the previous quarter figure of 2.99x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 32.84% of the total shareholding. Berkshire Hathaway Inc. and The Vanguard Group, Inc. holds the maximum interests in the company at 9.31% and 7.35%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Risks: The ongoing economic doldrums in the wake of the global coronavirus outbreak is instigating a decline in the company's revenues. KO’s leveraged balance sheet also poses risks with long-term debt of $39,502 million and a cash balance of only $11,385 million as of 25 September 2020. Furthermore, high debt may limit growth and any further increase in borrowings might worsen its risk profile.

Outlook: Although, KO did not provide 4QFY20 and FY20 guidance, it however sketched the expected currency impacts on its upcoming results. For 2020, KO predicts currency headwinds of 3% on comparable net revenues and 6% on comparable operating income. These estimates are based on current rates and hedge positions. For the 4QFY20, KO expects currency impact of 3% on comparable net revenues and 9% on comparable operating income. For FY21, the company anticipates having minimal currency impacts on comparable net revenues and comparable operating income.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of KO closed at $48.68 with a market capitalization of ~$209.2 billion. The stock is currently trading close to the average of its 52-week low and high level. The stock went up ~6.6% in the last nine-months period. On a technical analysis front, the stock has a support level of ~$47.23 and a resistance level of ~$54.84. Considering the above factors, we have valued the stock using a P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers such as National Beverage Corp (NASDAQ: FIZZ), Constellation Brands Inc (NYSE: STZ), Monster Beverage Corp (NASDAQ: MNST), to name few. Hence, we recommend a “Buy” rating on the stock at the closing price of $48.68, up by 0.35% on 20 January 2021. 

KO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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