Summary
- Coca-Cola has soared to new highs.
- The company's results have been strong, but I see growth challenges ahead.
- Cautiousness on Coca-Cola is due to valuation only, not the business, meaning the stock can be bought on pullbacks.
New all-time highs
Coca-Cola (KO) is just one of many large-cap stocks that are making new all-time highs or close to it. The market seems to be in a state of euphoria and it is driving the valuations of some companies to new heights. Coca-Cola is one of these stocks as it crested $51 for the first time ever earlier this month as investors continue to bet on the company's strategic plan for the future. While this isn't your father's Coca-Cola, the valuation has gotten to the point at new all-time highs that investors should consider taking profits on the beverage giant.
Q1 earnings show signs of worry for growth potential
The company reported Q1 earnings relatively recently, and since the report, the stock has essentially done nothing but go higher. Results are improving and definitely moving in the right direction, but investors should keep in mind also that with the recent improvement in results comes comparisons in subsequent years that are much more difficult.
Organic sales rose 6% year-over-year as the company's EMEA region and bottling business, respectively, contributed to top-line growth. However, 2% of the 6% gain was due to a revenue timing shift, and thus, without this, organic sales would have risen 4%. Unit case volume rose 4% as weakness in North America was more than offset by strength elsewhere. However, weakness in the company's home market shouldn't be taken lightly.
Operating margin was essentially flat on an adjusted basis, coming in at 30.5% of revenue. Margin expansion on an underlying basis was offset by a 260bps headwind from currency translation, owed to Coca-Cola's significant non-US presence. Indeed, currency translation is nearly always a big factor one way or the other for Coca-Cola depending upon the price action of the US dollar.
EPS came at $0.38 from continuing operations, which was a strong 24% gain year-over-year. However, EPS, on a comparable basis, rose just 2% to $0.48, owed in part to an 11% headwind from Forex translation.
Coca-Cola reiterated guidance of 4% organic revenue growth this year and total sales growth of 12-13%. However, EPS should be flat to last year at something around $2.10.
