Coca-Cola: Improving But Get The Best Price (NYSE:KO)

Coca-Cola (KO) is a great American brand. There is no denying this simple fact. But it is also a true dividend champion. While shares have rebounded off the COVID-19 selloff lows in March, we believe shares are still a buy in the $40’s. Thus shares need to pull back a bit, but are definitely long-term bullish. This dividend growth name belongs in your long-term portfolio holdings. There is no question about it. Right now, shares are in rally mode following the most recent earnings report. In a choppy market, it is good to see this dividend champion deliver such growth, and in turn, the stock is providing capital growth. In this column, we discuss recent performance of the company. We also offer our outlook for the remainder of 2020. Let us discuss.

Revenue growth

On the surface, the Q3 report was well ahead of our expectations. We were looking for revenues of around $8.61 billion to $8.75 billion for the quarter. We expected a sales decline given the leaner nature of the business and the COVID implications, but we, of course, were anticipating 5-6% organic revenue declines for the year as well thanks to the pandemic. The company saw revenue of $8.65 billion and were at the mid point of our expectations. The results beat consensus by $280 million. Our projections were slightly more bullish than the Street but were looking for a decline of nearly 10%, and this stemmed from the crisis.

Sales are impressive, all things considered, in the crisis. Comparable organic sales were down 6%. What drove this? Much of this was driven by pricing, though volume is still solid. Total unit case volume was down 4%. While volume growth was down across the board, pricing gained in North America. Still, things were down sizably, but this was expected mostly due to lower commercial sales

Expense management

This has made the company more profitable from an operating standpoint. Selling and administrative expenses continue to be well managed, and targeted advertising campaigns have had a direct impact. Operating margin, which included items impacting comparability, was 26.6% versus 26.3% in the prior year, while comparable operating margin (non-GAAP) was 30.4% versus 28.1% in the prior year. Operating margin expansion was primarily driven by effective cost management, partially offset by top-line pressure and currency headwinds. Given the better than expected revenues and the well-managed expenses, we saw a beat on earnings.

Earnings power

Q3 earnings per share came in at $0.55. This beat our estimate of $0.50 per share by $0.05. These earnings were better than we expected as a direct result of better than expected organic revenues and better margins. This was a decline of 2% from last year, however.

2020 projections

For 2020, we expect greater efficiencies across operations. That said, through three quarters, we believe our expectation for organic revenue growth falling 5-7% is realistic. While things are improving globally, COVID is weighing badly. Given the margin expansion we have seen here in Q3 which has outpaced our initial expectations, we also see earnings doing a bit better than we initially expected, but do expect declines from last year. We now see earnings coming in at $1.87 to $1.90.

Final thoughts

Our advice is to hold the stock here. The time to add more was back in April/May. We will get another dip. Long-term, the name is solid and we like the yield at 3%. We want a better price. That said, we are bullish overall as we are encouraged by our expectation for growth in organic sales once businesses reopen following the crisis and restaurant volume picks up. This may be 2-5 quarters away, so time your buys. But this is a great stock to hold for the long-term, but you should still be selective in picking your spots to add even if you plan to hold for decades. Get the best price.

As always, we encourage and welcome your comments.

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Disclosure: I am/we are long KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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