The Coca-Cola Company is ready to bubble higher

Key Points

• The Coca-Cola Company had a solid quarter, outperforming PepsiCo, and gave favorable guidance.
• The stock was trading below the analysts' lowest price target, offering a deep value for income investors.
• The 3% yield may not last long as this stock moves higher on analysts' support and valuation. 

The long-running debate of whether the Coca-Cola Company NYSE: KO or PepsiCo NASDAQ: PEP is the better stock is ongoing, but it looks like Coke is the better buy today. The company’s Q4 results echo details of PepsiCo’s, which point to strength in the beverage department offset by weaker results in snacks. Because The Coca-Cola Company is a pure play on beverages and sustaining a higher level of organic growth, it will outperform in 2024. The question is how high this consumer staples stock price can go.

The market for KO shares is at an inflection point. It is moving higher within a trading range and on track to cross above it. Because the analysts' lowest target is above the pre-release price action, upward revisions are expected now that results are in, and the range of targets suggests a 90% chance the stock will move into it, KO shares will likely move higher. The pre-release consensus suggests KO stock will move higher by at least 10% while paying its dividend worth 3% with shares near $60. 

The Coca-Cola Company leverages brand and strategy

The Coca-Cola Company had a good quarter aided by its lean into brand and strategy. The company relies heavily on local bottlers to carry the Coca-Cola message to the target markets, which is working. Revenue grew by 6.9% in Q4, driven by volume and pricing, to outpace the Marketbeat.com consensus by 150 basis points. The strength is due to a 2% increase in unit case volume, a 3% increase in concentrate sales, and a 9% gain in price/mix. Organic sales are up 12%, aided by a 1% tailwind from an additional day. 

Strength was reported in all segments but was notable in all markets outside the US. US sales rose by 5% while EMEA, Latin America, and Asia Pacific grew by double-digits to align with the expectation for broad emerging market strength in 2024. 

The margin news is good but not the catalyst for higher share prices that it might have been. The company widened its operating margin by 50 bps GAAP and 40 adjusted to leave the GAAP EPS down 2% YOY and the adjusted earnings in alignment with the consensus. As-expected earnings are fine but, in this case, weak due to the top-line strength, and the guidance isn’t much of a catalyst either. 

The Coca-Cola Company expected organic growth to continue in 2024 but to slow to 6% to 7%. Growth will be impaired by FX headwinds and divestiture/restructuring, which will also impact the bottom line. The company expects a 4% to 5% FXN increase in earnings compared to the $2.69 posted for 2023, which is good but only as expected. 

The Coca-Cola Company is still a tasty dividend

The Coca-Cola Company is a solid dividend for income investors, trading at a value level relative to the past few years at 22X earnings and yielding 3.1%. The payout ratio is nearly 70% of its earnings, but the distribution is reliable and expected to grow. The pace of distribution growth isn’t large, but it is sustainable, given the outlook for earnings growth in 2024. 

The price action in KO is advancing in premarket trading following the release. The market is up about 0.75%, trading above the analysts' $60 floor. Assuming the market follows through on this signal, the price for KO should continue higher over the next few sessions. The next target for resistance is near $62.50 and may be reached quickly. If the analysts start raising their targets (as they did for PepsiCo), it may not pose much resistance at all. However, if the market can sustain support above $60, KO shares could remain range-bound until later in the year.