Coca-Cola Stock: Fundamentals Don’t Support Current Share Price (KO)

Iconic companies almost always have a premium. While many well-known brands have been very good long-term investments, these labels almost always make investors pay for famous product names.

The Coca-Cola Company (NYSE:KO) is one of the most recognized brands in the world. Today, the company sell over 500 products in 200 different countries. Coke has a market capitalization of nearly $300 billion.

Although the well-known beverage company has been one of the best performing stocks in the market for some time, the stock has underperformed over the past decade.

Coca-Cola has provided investors with total returns of 133.2% since 2014, while the S&P 500 has provided investors with total returns of 237.5% over the same time frame.

I last wrote about The Coca-Cola Company in May of this year and rated the company as a sell. Today I am changing my rating Coke on a strong sale. The company’s latest earnings report contains several warning signs, and management likely won’t be able to continue generating earnings with what appears to be unsustainable price increases. Coca-Cola is also likely to continue to face headwinds, with the stock looking overvalued using multiple metrics.

While Coca-Cola’s recent earnings report looked solid on the face of things, the statement contained some warning signs. The company reported second-quarter earnings of $0.84 per share, compared with expectations of $0.81 per share. Management also reported revenue of $12.36 billion, compared to expectations of $11.76 billion. The company slightly raised its already conservative guidance. Management now expects earnings growth of 5-6%, up from previous expectations of 4-5%.

There are more signs that the US and global economy are weakening, with many key retailers such as Target ( TGT ), Walmart ( WMT ) and McDonald’s ( MCD ) reporting that consumers are increasingly trading down. Credit card debt and delinquency rates have reached near all-time highs in the US, while growth rates in China and the EU are also slowing. Analysts also expect consumer spending to ease in the back half of the year, and recently revised jobs reports are further evidence that the economy is slowing. While Coca-Cola has traditionally sold the company’s products at a very low price, the corporation has significantly increased prices since 2021, both in the US and abroad. Coca-Cola raised prices 24% net in Europe, the Middle East and Africa, 19% in Latin America and 11% in North America this year.

The company’s unit volume was flat or negative in both the US and EMEA. With tariffs still high and consumers facing increasingly difficult choices, Coca-Cola likely won’t be able to drive revenue and earnings growth with what would likely be unsustainable price increases as the U.S. economy and from abroad continues to deteriorate.

Coca-Cola’s quarterly revenue growth rate has slowed steadily for nearly 3 years.

Coca-Cola also continues to face significant forex headwinds, and these currency challenges should remain for a number of reasons. The company currently forecasts a 4% negative impact from foreign exchange issues on net sales and an 8% negative impact from foreign exchange issues on earnings for the third quarter. Coca-Cola derives nearly 65% ​​of the company’s revenue from outside the US.

Even as the Fed signaled that the market expected interest rate cuts to begin, Powell has argued for some time that the central bank sees efforts to reduce inflation as long-term. Prices also remain high even though inflation rates have fallen, and the main drivers of inflation, such as labor shortages and rising wages, remain in the economy. The ECB and China’s central bank have also been much more aggressive than the Fed in cutting interest rates, and the US economy remains the strongest in the world. The dollar is likely to remain strong against the euro and other major world currencies.

Coca-Cola is pricing its products in the U.S. and abroad at much higher levels today than in the past, the company is more vulnerable to business cycles than normal, as shown by the beverage company’s slowing revenue and unit volume growth of sales.

This is also why the stock looks overvalued at 26.88x forward GAAP earnings and 23.99x forward cash flow. While Coca-Cola’s 5-year average valuation is 25.2x forward GAAP earnings and 23.60x forward cash flow, Coca-Cola is currently in a much more challenging operating environment as the company facing slowing growth, rising costs and rising forex headwinds.

Coke is expected to grow revenue at a single-digit rate over the next 3 years, and consumers are increasingly trading lower even with lower ticket purchases in more mature economies such as the US and EU. Management has also been conservative on share buybacks, and with Coca-Cola’s cash flow also declining over the past year, the company is unlikely to aggressively buy back shares going forward.

While all investment theses have risks, and if the Fed were to start cutting interest rates aggressively or pursue other forms of monetary stimulus, such as another round of quantitative easing, the dollar would likely weaken significantly and interest rates US growth could recover. However, with prices high and Powell charming that the effort to reduce inflation will be a multi-year struggle, that seems highly unlikely. Growth rates in China and the EU are likely to remain weak as Europe is more vulnerable to rising prices and the negative impact of China’s weak housing sector continues to weigh on consumers in the world’s second-largest economy.

Coca-Cola has been one of the best-performing stocks on the market for decades, but the flagship company has consistently and significantly underperformed the broader indices over the past decade. Coca-Cola also relies heavily on what appear to be unsustainable price increases, and the company’s higher prices make its business model more vulnerable to business cycles and declining consumer trading. While Coca-Cola remains one of the most recognizable brands in the world, investors should be able to find better value elsewhere.