5 Reasons Coca-Cola's Stock Is Going Flat

MarketsMotley Fool

Shares of Coca-Cola (NYSE: KO) recently tumbled after the beverage maker posted mixed fourth quarter numbers. Its revenue fell 6% annually to $7.1 billion, topping expectations by $30 million. Its non-GAAP EPS rose 9% to $0.43, which matched the consensus estimate.

Those growth rates seemed solid, but Coca-Cola expects its organic sales to rise 4% in 2019 and for its non-GAAP EPS to stay roughly flat, compared to 5% organic sales growth and 9% EPS growth in 2018. CEO James Quincey stated that the company was "being prudent" in its outlook for 2019 based on "the multiple reductions in global economic growth outlook" and its "own experiences" in certain emerging and developing markets.

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That downbeat forecast caused investors to dump Coca-Cola, which is often considered a safe haven during market downturns. Let's take a look at five other major reasons Coca-Cola's stock is fizzling out.

1. Declining soda consumption

Soda consumption in the US is currently at its lowest levels in over three decades according to Beverage-Digest. That trend, which can be attributed to a consumer shift toward healthier beverages, is also reflected in other developed countries.

Coca-Cola diversified away from sodas with teas, sports drinks, juices, and bottled water to offset those declines. However, its case volume still remained flat year-over-year during the fourth quarter, and its sales growth can mainly be attributed to higher prices. This strategy will help Coca-Cola tread water over the short term, but it's unsustainable over the long term.

2. Reported vs. organic sales growth

Coca-Cola refers to its organic sales growth -- which excludes currency impacts, acquisitions, divestments, and other "one-time" charges -- as a measure of its overall health. Unfortunately, many of these "one-time" charges, like currency headwinds and the refranchising of its bottling operations, have been recurring over multiple quarters. That's why there's a big gap between Coca-Cola's organic and reported sales growth, and why the former looks much stronger than the latter:

Metric

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Organic

5%

5%

6%

5%

Reported

(16%)

(8%)

(9%)

(6%)

The bulls will argue that Coca-Cola's reported sales growth will improve once it concludes its refranchising activities and the dollar weakens. However, PepsiCo's (NASDAQ: PEP) organic and reported sales growth both remained more consistent than Coca-Cola's over the past year, which arguably makes it a more attractive alternative:

Metric

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Organic

2%

3%

5%

5%

Reported

4%

2%

2%

0%

PepsiCo's growth isn't weighed down by long-term bottling refranchising issues, and it's better diversified with Frito Lays snacks and Quaker packaged foods -- which generated nearly 30% of its revenue in 2018.

3. Its dividend isn't that dependable

Coca-Cola is a dividend aristocrat that's raised its payout annually for over five decades, and it pays a decent forward yield of 3.4% today. However, Coca-Cola paid out its dividends with more than 100% of its earnings and free cash flow (FCF) over the past 12 months, mainly due to the refranchising of its bottling operations.

Coca-Cola probably won't stop raising its dividends or lose its aristocrat title, and its payout ratios should drop again once it finishes its refranchising plans. However, it might offer lower dividend hikes every year until that happens.

Meanwhile, PepsiCo spent 39% of its earnings and 80% of its FCF on its dividends over the past 12 months, and pays a comparable forward yield of 3.3%. So once again PepsiCo seems like a better investment than Coca-Cola.

4. Questionable investments and acquisitions

Coca-Cola repeatedly acquired smaller companies and invested in others to diversify its business away from its flagship sodas. Notable acquisitions have included Minute Maid, Barq's, Fuze, Honest Tea, and Moxie. It also acquired a major stake in energy drink maker Monster Beverage (NASDAQ: MNST) in 2015.

Many analysts argued that Coca-Cola should simply buy Monster, which is expected to generate double-digit sales and earnings growth this year. But in a polarizing move, Coca-Cola decided to buy Costa Coffee, the leading coffee chain in the UK, for $4.9 billion instead.

Many analysts weren't impressed by the deal. Credit Suisse analyst Tim Ramskill noted that Coca-Cola paid a "huge premium" for the coffee chain, while Hargreaves Lansdown analyst Nicholas Hyett noted that Coca-Cola valued Costa's earnings "higher than those of the mighty Starbucks." That acquisition and other investments could throttle Coca-Cola's earnings growth.

5. The stock isn't cheap

Lastly, Coca-Cola trades at 20 times forward earnings, which is pricey relative to its forecast for flat earnings growth this year. PepsiCo expects its core earnings to slip 3% this year, but its stock is slightly cheaper than Coca-Cola's at 19 times forward earnings.

Coca-Cola's multiple was likely inflated because it's considered a bear-market-friendly stock in a turbulent market. However, there are other consumer staples stocks that trade at lower multiples and pay higher dividends -- which indicate that it isn't an ideal defensive play.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Monster Beverage and Starbucks. The Motley Fool has a disclosure policy.