Thematic evaluation
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The Coca-Cola Co. (KO)

September 17, 2024

Compared to: PepsiCo, Inc. (PEP) | Monster Beverage Corp. (MNST) | Consumer Staples Select Sector SPDR Fund (XLP)

Our reasoning

Coca-Cola's current valuation appears slightly overvalued based on its above-average valuation multiples compared to industry peers and historical averages. While the company's strong brand, global presence, and growth prospects support a premium valuation, the ongoing IRS tax dispute and challenges in adapting to changing consumer preferences present significant risks that are not fully reflected in the current price.

Key takeaways
  • Coca-Cola is a leading global beverage company with a strong brand portfolio, a diverse product range, and a global footprint.
  • The company has demonstrated consistent revenue growth and profitability, but it faces challenges from declining margins, increasing debt levels, and a highly competitive market.
  • The company's ongoing tax dispute with the IRS represents a major legal and financial risk, with the potential for significant additional tax liabilities if the company does not prevail in the litigation.
  • The company's strategic priorities around brand building, innovation, digital transformation, and sustainability will be critical to maintaining its competitive edge and driving long-term growth.
  • The company's strong liquidity, cash flow generation, and strategic focus on growth and innovation position it well for long-term success.
  • The company's valuation is generally in line with its peers and the broader consumer staples sector, but it has been impacted by its declining profitability and increasing debt levels.
  • The company's price performance has been strong, outperforming both its benchmark and peers. However, the company's price performance has been less consistent than its benchmark, with periods of underperformance in the short term.
  • The company's future outlook is positive, with management expressing confidence in its ability to deliver on its updated guidance and longer-term objectives. However, the company's future performance could be impacted by factors such as macroeconomic conditions, competition, and the outcome of its tax dispute with the IRS.
Overvalued
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Evaluation summary

  1. Company Overview:

    • The Coca-Cola Company is a leading global beverage company with a diverse portfolio of iconic brands, including Coca-Cola, Sprite, Fanta, and others. The company operates in two main lines of business: concentrate operations (selling beverage concentrates, syrups, and finished beverages to bottling partners) and finished product operations (selling sparkling soft drinks and other finished beverages directly to retailers and distributors). Coca-Cola's products are sold in over 200 countries and territories through a network of independent bottling partners, distributors, wholesalers, and retailers, as well as the company's own consolidated bottling and distribution operations. Major competitors include PepsiCo, Nestlé, Keurig Dr Pepper, Danone, and various regional and local beverage companies.
    • The company's revenue is primarily generated from the sale of non-alcoholic beverages, with a significant portion coming from its flagship Coca-Cola brand. The company targets a broad consumer base across various demographics and geographic regions, focusing on providing refreshing and convenient beverage options for everyday consumption.
    • The company's target market is global, encompassing consumers of all ages and income levels. Coca-Cola aims to cater to diverse preferences and lifestyles through its wide range of products and marketing strategies.
    • For comparative analysis, we will be using the Consumer Staples Select Sector SPDR Fund (XLP) as a benchmark and Monster Beverage Corp. (MNST) and PepsiCo, Inc. (PEP) as industry peers.

  2. Financial Performance:

    • The Coca-Cola Company has demonstrated consistent revenue growth over the past few years, with a 6% increase in net operating revenues in 2023. This growth has been driven by favorable pricing, product/geographic mix, and acquisitions/divestitures, partially offset by unfavorable foreign exchange impacts.
    • The company's gross profit margin has improved to 59.5% in 2023 due to pricing, mix, and structural changes, but was impacted by higher commodity costs. Operating income grew 4% in 2023, with the increase partially offset by higher selling/administrative expenses, other operating charges, and foreign exchange headwinds.
    • The company's profitability has been impacted by declining net profit margin and EBITDA margin, indicating pressure on margins. The company's ability to generate profit relative to its assets and equity is also declining, as evidenced by the decreasing return on average assets, return on average total equity, return on average total capital, and return on average invested capital.
    • Compared to its peers, KO has consistently outperformed both MNST and PEP in terms of financial performance, with higher annualized returns and lower volatility. This suggests that KO has been a more consistent and less risky investment than its peers.

  3. Operational Efficiency:

    • The company's balance sheet reflects a strong liquidity position, with increasing cash and short-term investments and a current ratio above 1. However, the company's financial leverage is high, as evidenced by the total debt to total equity ratio and debt/EBITDA, which are both above the industry average.
    • The company's working capital management has been impacted by fluctuations in accounts receivable and inventories, indicating potential inefficiencies. The company's refranchising of bottling operations is likely contributing to the decrease in fixed assets, while the acquisition of BodyArmor is likely contributing to the increase in intangible assets.
    • The company's cash flows are increasing, but at a slower pace than in the past. The company's free cash flow is expected to remain strong, which will allow the company to continue to invest in growth and return capital to shareholders. However, the company's debt levels are expected to continue to increase, which could increase financial risk.
    • The company's asset utilization efficiency is declining, as evidenced by the decreasing return on average assets, return on average total equity, return on average total capital, and return on average invested capital. This suggests a potential decline in operational efficiency.
    • Compared to its peers, KO has demonstrated higher operational efficiency, with a higher Sharpe Ratio and lower beta values, indicating a lower risk profile.

  4. Growth Opportunities:

    • The company is pursuing growth opportunities through market expansion, M&A, R&D, and geographic expansion. The company has a strong track record of successful M&A, with the acquisition of BodyArmor being a recent example.
    • The company's R&D pipeline is focused on developing new products and innovations to meet evolving consumer preferences. The company is also investing in digital and tech-enabled innovations to drive more effective and efficient operations.
    • The company is expanding its geographic footprint, particularly in developing markets like Latin America, Africa, and parts of Asia. The company is also refranchising its bottling operations in certain territories to streamline its operations and prioritize higher-growth businesses.
    • The company's strategic focus areas include brand building, innovation, digital transformation, and sustainability. The company is committed to investing in these areas to maintain its competitive edge and drive long-term growth.
    • The company's capital allocation strategies are focused on investing for growth, supporting the dividend, and remaining dynamic and opportunistic. The company has a strong balance sheet and ample capacity to pursue its capital allocation agenda.

  5. Risks and Threats:

    • The company faces several risks, including unfavorable economic and geopolitical conditions, increased competition, inability to successfully manage new product launches, supply chain disruptions, and cybersecurity/data privacy issues.
    • The company is also exposed to risks related to obesity and health concerns, evolving consumer preferences, product safety and quality, and sustainability matters.
    • The company's reliance on bottling partners and potential financial deterioration of bottling partners pose significant risks.
    • The company is exposed to foreign exchange rate fluctuations and changes in interest rates.
    • The company's ongoing tax dispute with the IRS represents a major legal and financial risk, with the potential for significant additional tax liabilities if the company does not prevail in the litigation.
    • The company's competitive landscape is highly dynamic, with increasing competition from both established players and new entrants. The company's market share has been relatively stable, but it faces ongoing pressure from competitors.
    • The company is subject to various regulations related to product labeling, advertising, and environmental sustainability. The company has a history of compliance with these regulations, but it faces ongoing scrutiny and potential changes in regulations.

  6. Valuation Analysis:

    • The company's valuation metrics, such as P/E, EV/EBITDA, and price-to-sales, are generally in line with its peers and the broader consumer staples sector. However, the company's valuation has been impacted by its declining profitability and increasing debt levels.
    • Compared to its peers, KO has a higher valuation, reflecting its stronger financial performance and lower risk profile. However, the company's valuation is still relatively modest compared to other growth-oriented companies in the consumer staples sector.
    • Potential catalysts for the company's valuation include continued revenue growth, margin expansion, and successful execution of its strategic initiatives. However, the company's valuation could be negatively impacted by unfavorable macroeconomic conditions, increased competition, and the outcome of its tax dispute with the IRS.

  7. Price Performance:

    • The Coca-Cola Co. (KO) has generally outperformed the Consumer Staples Select Sector SPDR Fund (XLP) over various time periods, including year-to-date, 3 months, 6 months, 1 year, 2 years, and 3 years. This suggests that KO has been a stronger performer than the broader consumer staples sector.
    • However, KO's performance has been less consistent than XLP's, with periods of underperformance in the short term, such as the 1-week and 1-month periods.
    • Compared to its peers, KO has consistently outperformed both MNST and PEP over various time periods, indicating a more resilient and profitable company.
    • KO has provided higher annualized returns than MNST and PEP over the past three years, with values ranging from 12.28% to 27.4%. However, KO has also had lower annualized volatility than its peers, with values ranging from 6.45% to 22.49%. This suggests that KO has been a more consistent and less risky investment than its peers.

  8. Future Outlook:

    • The company's management has expressed confidence in its ability to deliver on its updated guidance and longer-term objectives, despite an uncertain macroeconomic environment. The company expects 9-10% organic revenue growth and 13-15% comparable currency-neutral earnings per share growth for 2024.
    • Analyst estimates for the company's future performance are generally positive, with consensus expectations for continued revenue growth and earnings per share growth. However, the company's future performance could be impacted by factors such as macroeconomic conditions, competition, and the outcome of its tax dispute with the IRS.

  9. Summary:

    • The Coca-Cola Company is a leading global beverage company with a strong brand portfolio, a diverse product range, and a global footprint. The company has demonstrated consistent revenue growth and profitability, but it faces challenges from declining margins, increasing debt levels, and a highly competitive market.
    • The company's financial performance has been solid, with revenue and profit growth in 2023, but it continues to be impacted by macroeconomic headwinds like foreign exchange fluctuations and rising commodity costs.
    • The company's ongoing tax dispute with the IRS represents a major legal and financial risk, with the potential for significant additional tax liabilities if the company does not prevail in the litigation.
    • The company's strategic priorities around brand building, innovation, digital transformation, and sustainability will be critical to maintaining its competitive edge and driving long-term growth.
    • The company's strong liquidity and cash flow generation provide financial flexibility, but the company must carefully manage its capital allocation to balance investments, shareholder returns, and potential tax obligations.
    • The company's valuation is generally in line with its peers and the broader consumer staples sector, but it has been impacted by its declining profitability and increasing debt levels.
    • The company's price performance has been strong, outperforming both its benchmark and peers. However, the company's price performance has been less consistent than its benchmark, with periods of underperformance in the short term.
    • The company's future outlook is positive, with management expressing confidence in its ability to deliver on its updated guidance and longer-term objectives. However, the company's future performance could be impacted by factors such as macroeconomic conditions, competition, and the outcome of its tax dispute with the IRS.
    • Overall, The Coca-Cola Company is a well-established and financially sound company with a strong brand portfolio and a global footprint. The company faces challenges from declining margins, increasing debt levels, and a highly competitive market. However, the company's strong liquidity, cash flow generation, and strategic focus on growth and innovation position it well for long-term success.
Peer fundamentals 
Fundamentals
Insights
  • Coca-Cola is a leading global beverage company with a diverse portfolio of iconic brands and a strong market position, but faces increasing competition and evolving consumer preferences that require ongoing innovation and adaptation.
  • The company's financial performance has been solid, with revenue and profit growth in 2023, but it continues to be impacted by macroeconomic headwinds like foreign exchange fluctuations and rising commodity costs.
  • Coca-Cola's ongoing tax dispute with the IRS represents a major legal and financial risk, with the potential for significant additional tax liabilities if the company does not prevail in the litigation.
  • The company's strategic priorities around brand building, innovation, digital transformation, and sustainability will be critical to maintaining its competitive edge and driving long-term growth.
  • Coca-Cola's strong liquidity and cash flow generation provide financial flexibility, but the company must carefully manage its capital allocation to balance investments, shareholder returns, and potential tax obligations.
  • The company's profitability is declining, as evidenced by the decreasing net profit margin and EBITDA margin.
  • The company's ability to generate profit relative to its assets and equity is also declining, as evidenced by the decreasing return on average assets, return on average total equity, return on average total capital, and return on average invested capital.
  • The company's financial leverage is high, as evidenced by the total debt to total equity ratio and debt/EBITDA, which are both above the industry average.
  • The company's asset utilization efficiency is declining, as evidenced by the decreasing return on average assets, return on average total equity, return on average total capital, and return on average invested capital.
  • The company's cash flows are increasing, but at a slower pace than in the past.
  • The company's free cash flow is expected to remain strong, which will allow the company to continue to invest in growth and return capital to shareholders.
  • The company's debt levels are expected to continue to increase, which could increase financial risk.
  • The company's revenue growth is expected to continue, but at a slower pace than in the past.
  • The company's profitability is expected to remain under pressure in the near term.
  • The company's liquidity position is expected to remain strong, but the company will need to carefully manage its debt levels to maintain financial flexibility.
Analysis
  • Revenue - Revenue growth is positive, but it is slowing down. - The company is facing pressure on its margins, which is impacting profitability. - The company needs to improve its expense control to maintain profitability. - The company's refranchising of bottling operations is likely contributing to the decrease in fixed assets. - The company's acquisition of BodyArmor is likely contributing to the increase in intangible assets.
    • Profitability
      • The company's profitability is declining, as evidenced by the decreasing net profit margin and EBITDA margin.
      • The company's ability to generate profit relative to its assets and equity is also declining, as evidenced by the decreasing return on average assets, return on average total equity, return on average total capital, and return on average invested capital.
    • Liquidity
      • The company's liquidity position is strong, as evidenced by the increasing cash and short-term investments and the current ratio, which is above 1.
    • Solvency
      • The company's financial leverage is high, as evidenced by the total debt to total equity ratio and debt/EBITDA, which are both above the industry average.
      • The company's long-term solvency is strong, as evidenced by the strong free cash flow generation and the ability to service debt obligations.
    • Operational Efficiency
      • The company's asset utilization efficiency is declining, as evidenced by the decreasing return on average assets, return on average total equity, return on average total capital, and return on average invested capital.
      • The company's refranchising of bottling operations is likely contributing to the decrease in fixed assets.
    • Cash Flow Analysis
      • The company's cash flows are increasing, but at a slower pace than in the past.
      • The company's free cash flow is expected to remain strong, which will allow the company to continue to invest in growth and return capital to shareholders.
      • The company's debt levels are expected to continue to increase, which could increase financial risk.
      • The company's refranchising of bottling operations is likely contributing to the increase in capital expenditures.
      • The company's acquisition of BodyArmor is likely contributing to the increase in acquisitions.
    • Risk Factors
      • The company's increasing short-term debt could be a potential red flag, as it could indicate a reliance on short-term financing or a potential liquidity concern.
      • The company's increasing long-term debt could also be a potential red flag, as it could indicate a shift in the company's capital structure or a need for additional financing.
      • The company's decreasing free cash flow margin could indicate a potential concern about the company's ability to generate cash flow in the future.
      • The company's decreasing return on average assets, return on average total equity, return on average total capital, and return on average invested capital could indicate a decline in operational efficiency.
      • The company's ongoing tax dispute with the IRS represents a major legal and financial risk, with the potential for significant additional tax liabilities if the company does not prevail in the litigation.
    • Future Outlook
      • The company's revenue growth is expected to continue, but at a slower pace than in the past.
      • The company's profitability is expected to remain under pressure in the near term.
      • The company's liquidity position is expected to remain strong, but the company will need to carefully manage its debt levels to maintain financial flexibility.
      • The company's cash flows are expected to continue to grow in the future, but at a slower pace than in the past.
      • The company's free cash flow is expected to remain strong, which will allow the company to continue to invest in growth and return capital to shareholders.
      • The company's debt levels are expected to continue to increase, which could increase financial risk.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-09-04)
Consumer Staples Select Sector SPDR Fund (XLP)
  • Performance Comparison:
    • The Coca-Cola Co. (KO) has generally outperformed the Consumer Staples Select Sector SPDR Fund (XLP) over various time periods, including year-to-date, 3 months, 6 months, 1 year, 2 years, and 3 years. This suggests that KO has been a stronger performer than the broader consumer staples sector.
    • However, KO's performance has been less consistent than XLP's, with periods of underperformance in the short term, such as the 1-week and 1-month periods.
  • Risk and Return Analysis:
    • KO has provided higher annualized returns than XLP over the past 1, 2, and 3 years. This indicates that KO has generated greater returns for investors.
    • However, KO has also been more volatile than XLP, as evidenced by its higher annualized volatility. This suggests that KO's returns come with a higher level of risk.
    • The drawdown figures show that KO's maximum drawdown has been slightly higher than XLP's, indicating that KO has experienced larger declines in value during market downturns. This further supports the notion that KO carries a higher risk profile.
  • Risk-Adjusted Performance:
    • XLP has consistently shown a higher Sharpe ratio than KO, suggesting that XLP has offered better risk-adjusted returns. This means that XLP has generated higher returns for the level of risk taken.
    • The beta values for both KO and XLP have been consistently below 1, indicating that both are less volatile than the overall market. However, KO's beta has been slightly higher than XLP's, suggesting that KO is slightly more sensitive to market movements.
  • Overall Assessment:
    • KO has outperformed XLP in terms of absolute returns, but it has also been more volatile and has experienced larger drawdowns. This suggests that KO carries a higher risk profile than XLP.
    • While KO has generated higher returns, investors should consider its higher volatility and drawdown potential before making investment decisions.
    • XLP, on the other hand, has offered better risk-adjusted returns, as indicated by its higher Sharpe ratio. This makes XLP a potentially more attractive investment for investors seeking lower volatility and a more consistent return profile.
    • The beta values suggest that both KO and XLP are less volatile than the overall market, making them potentially attractive investments for investors seeking lower volatility.
    • Overall, the analysis suggests that KO is a growth-oriented stock with the potential for higher returns, but it also carries a higher level of risk. XLP, on the other hand, is a more defensive stock with a lower risk profile and a more consistent return profile.
Peers Price History(as of 2024-09-04)
PepsiCo, Inc. (PEP)Monster Beverage Corp. (MNST)
  • Performance Comparison: The Coca-Cola Co. (KO) has consistently outperformed both Monster Beverage Corp. (MNST) and PepsiCo, Inc. (PEP) over various time periods, including YTD, 1 week, 1 month, 3 months, 6 months, 1 year, 2 years, and 3 years. This suggests that KO has been a more resilient and profitable company than its peers.
  • Risk and Return Analysis: KO has provided higher annualized returns than MNST and PEP over the past three years, with values ranging from 12.28% to 27.4%. However, KO has also had lower annualized volatility than its peers, with values ranging from 6.45% to 22.49%. This suggests that KO has been a more consistent and less risky investment than its peers.
  • Risk-Adjusted Performance: KO has generally had a higher Sharpe Ratio than MNST and PEP over the past three years, with values ranging from -0.41% to 1.25%. This suggests that KO has been a better risk-adjusted performer than its peers. KO's beta values have generally been below 1, suggesting that it has been less volatile than the overall market. This indicates that KO has a lower risk profile than its peers.
  • Overall Assessment: The Coca-Cola Co. (KO) has consistently outperformed its peers, Monster Beverage Corp. (MNST) and PepsiCo, Inc. (PEP), in terms of both performance and risk-adjusted performance. KO has provided higher returns with lower volatility and drawdowns, indicating a more stable and resilient investment. While MNST has experienced periods of high growth, it has also been significantly more volatile and risky. PEP has been a more consistent performer than MNST, but it has not been as strong as KO in terms of both performance and risk-adjusted performance. Overall, KO appears to be a more attractive investment option for investors seeking a balance of growth and stability.
Peers Fundamentals(as of 2024-06-30)
PepsiCo, Inc. (PEP)Monster Beverage Corp. (MNST)

  1. Market Position and Size:

    • KO is the largest company in the peer group, with a market capitalization significantly larger than both MNST and PEP.
    • This size advantage is reflected in KO's revenue, EBITDA, and net income, which are all significantly higher than its peers.
    • However, KO's growth in these key financial metrics has been consistently lower than the peer group average over the past five years.

  2. Profitability and Efficiency:

    • KO's profitability metrics are generally higher than both its peers and the industry average, particularly its Gross Profit Margin.
    • However, KO's EBITDA Margin is lower than the industry average, suggesting that its operating expenses are relatively high compared to its peers.
    • KO's efficiency in generating returns is mixed, with its ROA and ROTE being higher than the industry average but lower than some peers.

  3. Financial Health and Stability:

    • KO's liquidity and solvency metrics are mixed, with its Current Ratio and Quick Ratio being lower than the industry average and some peers.
    • KO has a higher level of debt compared to its peers, which increases its financial risk and could limit its ability to invest in future growth.
    • However, KO's strong cash flow generation and profitability provide a solid foundation for its financial stability.

  4. Valuation and Market Perception:

    • KO's valuation metrics are generally higher than its peers and the industry average, suggesting that the market values its brand, market share, and profitability at a premium.
    • However, KO's P/E ratio is lower than MNST's, suggesting that the market may be pricing in its slower growth and declining profitability.

  5. Cash Flow and Capital Management:

    • KO is highly effective in generating cash from its operations, with a Net Operating Cash Flow significantly higher than its peers.
    • However, KO's Free Cash Flow growth has been consistently lower than the peer group average over the past five years, suggesting that its ability to generate free cash flow is lagging behind its peers.

  6. Growth and Future Prospects:

    • KO's growth trends are mixed, with some metrics showing consistently higher growth than the peer group average, while others show consistently lower growth.
    • KO's growth rates have been consistently decreasing over the 5-year period for several key metrics, suggesting that its growth is slowing down.
    • This deceleration in growth could be attributed to its mature business model and increased competition.

  7. Potential for Investment:

    • KO is a large-cap company with a strong brand and market share, but its growth has been slowing down in recent years.
    • Its high debt levels and declining profitability are also areas of concern.
    • Investors should carefully consider these factors before making an investment decision.

  8. Key Risks and Considerations:

    • KO's slower growth compared to peers could indicate a declining market share and a loss of competitive advantage.
    • Its high debt levels increase its financial risk and could limit its ability to invest in future growth.
    • Its declining profitability suggests that it may be struggling to maintain its margins in a competitive market.

  9. Overall Assessment:

    • KO is a financially strong company with a dominant market position, but it faces some challenges.
    • Its profitability and cash flow generation are strong, but its growth has been slowing down, and its debt levels are high.
    • Investors should carefully consider these factors before making an investment decision.