Coca-Cola (KO) investors, rejoice! The stock hit a new lifetime high of $52.19 last week as the liquidity continued to chase the low-beta, defensive names in a market, which is going through wild gyrations with every other piece of news.
That is why stocks like Procter & Gamble (PG), PepsiCo (PEP) and Kimberly-Clark (KMB) are also rallying consistently. However, I believe the recent run-up in KO has made the stock unattractive from a fresh purchase standpoint. Now would be a good time for the investors to step back and reassess whether by buying now they are truly investing or merely speculating based on the strong momentum.
Note: This analysis is not intended as a short thesis; not every article that cautions an investor is a bearish recommendation.
The weekly Coca-Cola price chart below highlights the strong uptrend that has survived the stock since 2011.
Interestingly, the stock has just hit the upper limit of the broad range, which could exert profit-booking in the coming weeks. At the higher end of this 10 percent range, declines have occurred on numerous occasions in the past, so there exists a probability that a similar decline could be in the offing now. If the consistent liquidity inflow can ensure that Coca-Cola breaks and sustains above the resistance discussed, then the levels of $55 or nearby could not be ruled out.
For investors, Coca-Cola is also a dividend stock, and therefore, it becomes imperative to discuss how much the stock is offering in fixed income compared to the historical performance.
The KO dividend yield chart submitted below reveals that the yield has plummeted to 5-year lows as the share price appreciation has outpaced the dividend growth rate. This, in itself, should be enough deterrent for the dividend investors to not invest more in KO. Just because the 3 percent dividend is safe does not make it worthy enough to buy at an expensive forward PE of 24.5. All the data submitted below has been fetched from Seeking Alpha.
For an optimal entry point in KO, which offers a reasonable valuation as well as a higher dividend yield, an investor simply does not have to rush in at higher levels.
The dividend yield history of Coca-Cola reveals that just by waiting patiently, an investor has been able to lock-in a yield of more than 3.5 percent in every year since 2010. Please see the maximum yield column in the table below.
Source: Seeking Alpha
To investors who are justifying buying Coca-Cola at the current levels, the EPS, as well as the revenue estimates for the next several quarters, will paint a disappointing picture. The EPS and the revenue growth are forecasted to be flat-to-negative until Jan 2022, as per the data presented below.
Additionally, as per Yahoo Finance, KO has already crossed the average price target of 22 analysts. The highest year-end target of $56 is in line with the technical breakout target reported in this article earlier.
As a result of the euphoric price rise, KO has a value grade of C- on Seeking Alpha.
SA defines the value grade as,
The value grade measures the stock’s valuation relative to the other stocks in its sector. The value grade is derived from a comparison of the stock’s historical valuation metrics, such as P/E ratio, Price/Book, Price/Sales and Enterprise Value to EBITDA, and forward metrics based on analysts’ estimates, to those of the other stocks in its sector. The overall value grade is derived from a comparison of the aggregate of all the underlying metrics and is therefore not an average of the grades for each underlying metric.
The above infographic is sufficient enough to conclude that Coca-Cola needs to be avoided at the current level. Putting investment dollars in KO now is akin to playing poker; you may get lucky, but there is also a high probability that it could backfire.
KO’s top-line has registered sharp deterioration in the last 5 years, declining by 30 percent to $32.25B in the said period.
When the company is failing to grow its top-line, can it ever make any sense to award it astronomically high P-S multiples?
I think this analysis has broadly covered the points that an investor would want to conduct his due-diligence on. If, and only if, a rigorous study of the company’s fundamentals confirms a higher mark-up in KO multiples, only then should an investor put his money to work now. Otherwise, he should be content that his investment dollars will come in handy whenever the market or this stock eventually pulls back.
Hope this helps!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.