09 Jul Coca-Cola (KO)

In late 2019 the latest Top 100 Megabrands report was released, and the runaway winner as the world’s most valuable brand, yet again, was the Coca-Cola company’s flagship offering Coke. They estimated the value of the “Coke” brand at somewhere between $35 billion and $45 billion USD.

However, Coca-Cola the company is so much more than just the Coke brand. They have spent the better part of two decades diversifying away from soft drinks and into a vast range of healthier alternatives. They saw the writing on the wall for the sugary beverages they have specialised in since the 1880s, and have successfully transitioned to be a global purveyor of beverage products across the board.  

Ironically, Coca-Cola was initially advertised as a health elixir. At the time carbonated beverages were seen as good for the health and Coke was patented and sold as a medicine with claims it could cure such things as morphine addiction, indigestion, nerve disorders, headaches, and impotence. It’s two main ingredients were cocaine and caffeine. No wonder it made people feel good. 

These days Coca-Cola owns more than 500 brands in over 200 countries. Of course, it still specialises in soft drinks and in Coke, Diet Coke, Fanta and Sprite owns four of the world’s top five selling drinks. But add to that energy drinks such as Powerade, bottled water products such as Mt Franklin, Aquarius, plus sparkling waters, sports waters, coffees, teas, juices, dairy drinks, and pretty much any other type of drink you can think of, and they have the market covered. If you would like to delve further into the world of Coke branding you can see every product they own here: https://en.wikipedia.org/wiki/List_of_Coca-Cola_brands

This diversification, in both product and geographical location, is what will set them up to continue to be a sector leader well into the future. It’s size and brand power gives Coke an advantage over rivals when competing for shelf and fridge space. If you want to sell Coke you’re going to have to sell Coke’s brand of orange juice, iced tea, and chocolate milk as well. 

It is also what will help them get through the current coronavirus shutdowns in a better position than most. There isn’t a spot on the globe that doesn’t sell Coke products. There will be times when some economies are shut down while others are open. There will be some places where Coke will have trouble shifting products in restaurants, and at sporting events and the like. But there will also be plenty more that are open, bringing in revenue and effectively keeping the lights on. 

Sales in destinations “away-from-home” account for 50% of total revenue, the other 50% is sold at supermarkets and local shops for home consumption. All of which are still open during shutdowns. So while consumption is down outside the home, it is increasing inside it. Coke is working hard to adjust their supply lines to be able to offer more home products over the next year as the pandemic continues. 

In the first quarter of 2020 revenue was down by just 1%, while profit was down by 2% year on year. That’s not a shabby result considering the pandemic had started to take hold by the end of March. However, CFO John Murphy advised in April that sales for the first few weeks of that month were down by 25%, and they were expecting a larger impact from the shutdowns in the second quarter. Coke will report second-quarter earnings on July 21, and we could see a great buying opportunity if the numbers disappoint. 

Coke is in a strong position financially. In March they issued $5 billion worth of debt and have $15.3 billion in cash and short term investments at hand. They have furloughed workers indefinitely and shut down certain supply lines to keep costs low and are taking a conservative approach to reopenings in the wake of Covid-19. They’ve also prioritised their dividend, which has increased for an impressive 58 consecutive years and currently sits at 3.8%. Who wouldn’t want to keep that streak going? 

Coke is undoubtedly a stock to hold for the long term. It is down around 25% from its February highs and I suspect we may see it lower as second-quarter earnings are released towards the end of the month. KO currently trades at $45. At the height of pandemic fears, it slipped to around $37.50, so I would expect anywhere around the low $40’s and into the $30’s to be a strong buying opportunity for the future.