Coca-Cola Consolidated: Stay-At-Home Business Is A Solid Buy

Summary

• There are solid reads for Q1 from beverage companies, like PepsiCo, that indicate growing demand.
• COKE's supply chain is in solid shape and stands ready to meet the growing demand.
• Further, we believe there are margin opportunities for the company at this stage.

We say this upfront: Coca-Cola Consolidated (NASDAQ:COKE) should not be confused with Coca-Cola Company (KO), particularly since the market cap of the two is $2 billion and $195 billion, respectively. In our view, COKE doesn't get enough coverage, particularly at a time when the beverage business is seeing a coronavirus-driven resurgence. We are thus affirming our Buy thesis on this name and discussing key tailwinds below:

Why We Are Bullish:

Stay-at-home business is a major tailwind: With the majority of the US population increasing their non-alcoholic beverage consumption in the aftermath of the stay-at-home policies, we believe that the producer and distributor, such as COKE, is going to receive its share of demand, particularly since it is directly tied to The Coca-Cola company and Dr. Pepper, two of the most in-demand brands in the US. By some estimates, beverage volumes were up as much as 9% Y/Y in April.

PepsiCo earnings provide a solid read: Per PEP's earnings, we are seeing a direct positive impact of the coronavirus situation, since March figures were stronger than either February or January, growing in upper single digits. We are seeing a beverage surge in deliveries, both from local restaurants that try to stay afloat and in bulk from Costco and other mass merchants. (We are using PepsiCo as a read-through because its business is various close to that of Coca Cola).

Supply chain remains sound: In light of the nature of the virus outbreak, there is always a concern that the production and distribution could be disrupted as a result of some employees getting sick. To the best of our knowledge, we haven't heard of any disruptions and, had their been material impact, believe that the company would have released such information ahead of its earnings call on May 5. There is a broader issue: if COKE has enough employees to meet its growing demand. However, the business model is dependent on automation, which should be enough to take care of incremental batches of soft drinks.

We see margin expansion, possibly by as much 70 bps in 2020: For a $2 billion market cap company, margins are not at the forefront of considerations; however, we do see a top-line-driven improvement along the margins, while the SG&A stays relatively unchanged. Once again: coronavirus is an opportunity that is more sticky at the distribution level than at the point of sale. This means that greater demand from stores will outlast the stay-at-home needs, eventually leading to inventory buildup (which is certainly not COKE''s headache). This in itself should provide for a relative margin stability in the short run.

International opportunities: We've said this before - non-US markets should not be discounted, no matter how strong COKE's domestic clients are. We are hopeful that with the new demand patterns emerging with the current pandemic perhaps, there will be some revaluation of COKE's international opportunities at the top. This is more of a story for 2021 and beyond, but one that should not be discounted from the multiple.

Valuation:

We believe that COKE merits P/E multiple of ~24x, which - when applied to our current EPS estimate of $12.23 - results in the target price of $303. Once the company reports earnings and we get more information about expected growth rate during 2Q, we would consider potentially expanding our multiple further and taking our target price higher.

About the Company:

Coca-Cola Consolidated Inc, formerly Coca-Cola Bottling Co. Consolidated, produces, markets and distributes nonalcoholic beverages. The company is an independent Coca-Cola bottler in the US, focused on nonalcoholic beverages. In addition to Coca cola, the company also focuses on Dr Pepper, Sundrop and Monster Energy, among other brands. There are also sparkling beverages, as well as energy products and noncarbonated beverages, such as bottled water, tea, ready to drink coffee, enhanced water, juices and sports drinks.

Risks to Our Bullish Thesis:

1. Reputation risks, since any cases of beverage poisoning or recall could undermine the company’s brand.

2. Country-specific regulation: every country is different in terms of food safety practices they have, which often results in extra red tape and incremental costs to the producers.

3. Tech risks: we could envision a situation when a cyberattack disrupts the online distribution.

Analyst’s 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.