Coca-Cola has been treading water for the past six months, recording a small loss of 3.5% while holding steady at $62.50. The stock also fell short of the S&P 500’s 9.1% gain during that period.
Is now the time to buy Coca-Cola, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
We're sitting this one out for now. Here are three reasons why KO doesn't excite us and a stock we'd rather own.
Why Is Coca-Cola Not Exciting?
A pioneer and behemoth in carbonated soft drinks, Coca-Cola (NYSE:KO) is a storied beverage company best known for its flagship soda.
1. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Coca-Cola’s revenue to rise by 2.1%, a deceleration versus its 7.1% annualized growth for the past three years. This projection is underwhelming and implies its products will face some demand challenges.
2. Operating Margin Falling
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Looking at the trend in its profitability, Coca-Cola’s operating margin decreased by 4.1 percentage points over the last year. Even though its historical margin is high, shareholders will want to see Coca-Cola become more profitable in the future. Its operating margin for the trailing 12 months was 20.6%.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Coca-Cola’s margin dropped by 15.2 percentage points over the last year. If its declines continue, it could signal higher capital intensity. Coca-Cola’s free cash flow margin for the trailing 12 months was 7.3%.
Final Judgment
Coca-Cola’s business quality ultimately falls short of our standards. With its shares lagging the market recently, the stock trades at 21× forward price-to-earnings (or $62.50 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better investments elsewhere. Let us point you toward one of our top digital advertising picks.
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