Will Coca Cola's Restructuring Give its Stock a Jolt?

Last week Coca Cola (NYSE:KO) announced plans to eliminate more than 2,000 jobs as the beverage company continues to grapple with the impacts of the COVID-19 pandemic. The move is part of a broader plan to reorganize the century-plus old behemoth into a more modern and nimble entity.

Coke's restructuring plan precedes the pandemic, but the events of 2020 have kicked things into high gear. While Pepsi's stock price has returned to pre-pandemic levels, Coca Cola's recovery has been relatively flat. However, a caffeinated transformation may be the perfect recipe to get Coca Cola's stock bubbling again.

Why is Coca Cola Restructuring?

While some consumer staples companies have flourished in the pandemic economy, Coca Cola has struggled. A largely homebound consumer base has translated to sales declines including a 9% drop in Coke's third quarter. The company estimates that it historically derives roughly half of its revenue from away-from-home consumption. Last quarter, away-from-home volume accounted for about 16% of overall sales volume.

With sales stagnating and costs rising, Coke is turning to the reduction of its global workforce to cut expenses and become more efficient. This involves both employee layoffs and contract buyouts. When it's all said and done, management is forecasting severance costs up to $550 million, but longer-term cost savings. The company will also create new operating units structured by region that will help it be more in tune with the local market preferences. More effective marketing should evolve from there.

Aside from the human capital moves, Coke is also accelerating its plans to revamp its product portfolio. Underperforming, non-core brands like Hubert's lemonade, Odwalla juices, the old-school Tab soda, and Zico coconut water are being eliminated. Also being phased out are the less popular Coke and Diet Coke varieties. Satellite products like Coke Life and Diet Coke Feisty Cherry haven't been on pandemic shoppers' lists whereas the good old basics have.  

Dumping brands that have weak sales trends will allow Coke's stronger products to shine. Non-carbonated brands like Powerade and Smartwater are still experiencing high demand. Coke continues to shift away from sodas to flavored waters, sports drinks, teas, and coffees to match consumers' increasing taste for healthier beverages.

What are Coca Cola's Growth Drivers?

Outside of creating a slimmer org chart and portfolio, Coke's transformation is also about becoming a more digitally focused company. The rationale here is to sync its business with a consumer preference for online ordering which has accelerated this year.

Investing in e-commerce has been a no-brainer for companies in most industries this year. Coke has jumped on this trend ramping investment in its digital capabilities to support retailers and connect with food delivery services.

Meanwhile, Coke's foray into the alcoholic beverage segment is another growth area. Its recent partnership with Molson Coors opens the door to launching new categories like hard seltzers and possibly even CBD-infused drinks.

From a geographic standpoint, Coke's biggest growth opportunity lies in developing and emerging markets. While it holds a roughly 20% market share in the portion of the developed market of the $1.6 trillion hot and cold beverages industry, its market share is half that in developing and emerging markets. Coke has a lot of room to expand in these faster-growing markets which account for approximately 80% of the world's population.

We may assume that by now Coke has a presence in every corner of the world, but it is still entering new markets. The company had rollouts in 14 new markets this year.

Toss in new growth markets like alcohol and the non-commercial space and its easy to see why investors should be viewing Coke's long-range prospects from a glass half-full perspective.

Is it a Good Time to Buy Coca Cola Stock?

Despite its recent struggles, Coca Cola remains one of the best ways for long-term investors to invest in the power of the global consumer. Let's not forget that prior to the pandemic, Coke's organic sales growth was accelerating (3%, 5%, and 6% in 2017, 2018, and 2019, respectively.)

Over time it delivers steady sales growth and profits that are supported by its current 25% net margin. Investors benefit from stable price appreciation, dividends, and share buybacks.

With this said, it will take some time for Coke's business transformation to bear fruit. Executing severance deals and reorganizing operations and workflows are lengthy processes if done right.

But the company will eventually get to a point where investors are reassured that the growth can resume. Of course, the general economic backdrop will be a major factor, but as conditions improve Coke should come out a stronger company on the other side of its restructure.

Coke's current valuation won't get investors fizzing at 28x forward earnings (compared to 26x for Pepsi). But the 3.1% dividend yield and steady growth potential make it a sound defensive play. Management's long-term EPS growth target is 8% at the midpoint.

A more streamlined product portfolio combined with opportunities for international expansion make for a solid springboard for profit growth. With Coke's share price still 12% from its pre-pandemic peak, it may be worth sipping on a small position.