Leading Beverage Company's Stock Bubbles Higher: Rally Ahead

Key Points

• Coca-Cola Company struggled with FX translation in Q2 but navigated difficult times well, setting it up to sustain growth. 
• Adjusted margin set a record, FCF is solid, and capital returns are safe.
• Analysts are leading this market to a new all-time high and may catalyze a multi-quarter rally in this stock.

Coca-Cola Company NYSE: KO struggled with FX conversion in Q2 but navigated difficult times with aplomb, setting its stock up to move higher and set a new all-time high. The critical details are that price, mix, and timing of sales offset the weaknesses, paving the way for a guidance increase. The guidance expects another 100 basis points of top-line growth and a widening margin, which should be enough to keep the analysts happy. 

As it is, MarketBeat tracks 11 analysts with current ratings, and they are leading this market to a new high. Analysts' activity in the two months before the Q2 release includes numerous price target increases and an initiated coverage, leading this market to the high end of the expected range or a gain of at least 5%. Because the 5% gain puts the stock at a new all-time high, it is the likely beginning of a rally that could last well into next year. 

Coca-Cola Has Industry-Leading Quarter: Raises Guidance

Coca-Cola issued some mixed results, but the underlying details are strong. The company’s $12.4 billion net revenue is up 3.3%, leading its largest competitor, PepsiCo NASDAQ: PEP, by hundreds of basis points despite the impact of FX conversion. The top-line outpaced the consensus by 550 basis points on a 2% increase in global unit case volume. 

Organically, the company grew by 15%, with the reported top and bottom-line results impacted by FX translation. Organic growth drivers are a 9% increase in price/mix compounded by a 6% increase in concentrate sales. Regionally, all segments produced organic growth, but currency headwinds sapped strength from APAC, Global Ventures, and Bottling Investments, which produced the weakest results, down 25% YoY. Latin America, the strongest segment, grew by 20%. 

The margin news is good. The company’s pricing efforts in inflation-hit economies are helping to sustain a solid margin. While GAAP results are down YoY, the adjusted operating margin is up 80 bps, producing leverage growth on the bottom line. The adjusted EPS of $0.84 is up 7% compared to last year and outpaced consensus by 370 bps, leading the company to raise guidance. Coca-Cola improved its guidance for revenue and earnings, now calling for 9% to 10% organic revenue growth and 5% to 6% EPS growth or about $2.84 compared to the $2.82 consensus forecast.

The Coca-Cola Company Can Sustain Its Capital Return Growth

Among the salient details from the Coca-Cola report are that free cash flow remains solid, the balance sheet is healthy, and capital returns are safe. Capital returns include the dividend and share repurchases, which reduced the count by 1% average for the quarter. The dividend is losing some appeal with share prices rising, but the yield is still more than 100% better than the average S&P 500 company, with shares equally valued near 22x, and the distribution is growing. Investors may not expect robust double-digit increases, but the outlook for earnings growth and share repurchases suggests that a mid-to-high single-digit CAGR is possible and sustainable. The last increase was worth 6.5% to investors, and the subsequent increase is due March 2025. 

Coca-Cola Bubbles to Fresh Highs

The Q2 report catalyzed the KO market to move higher. Early premarket activity has the stock up nearly 2% and trading at what would be a fresh, two-year closing high if held until the end of the session. Assuming the market follows through with this indication, shares of KO could retest or exceed the all-time high within a matter of weeks. In this scenario, a move to a new high would break the market out of an almost three-year trading range and open the door to a sustained rally.