Is Coca Cola (KO) Overvalued?
The Coca-Cola Company, the leader of the beverage industry, a giant favored by Warren Buffett, faces serious business troubles which deteriorate Company’s fundamentals:
the revenue of the company has declined 13%, from $48 Billion to $41,83 Billion,
net income has declined 28%!!!, from $9 Billion to $6,52 Billion.
Chart 1: Coca cola’s annual revenue and net income
Earning per share EPS is also declining but dividends are rising.
Chart 2: Coca Cola’s earning per share and dividends
The decline of EPS would be more dramatic if the company hasn’t buy back own shares. At the end of 2012, there were 4,583 million KO shares which declined to 4,367 million at the end of 2016.
The Company’s price-to-earnings ratio (P/E ) for a twelve-month period is staggering 28,9 which has risen from 19 since end of 2012.
The declining revenue doesn’t justify the very high P/E of 29. If the decline continues then the company cannot sustain the payment of dividends, not to mention rising them. In this case, the stock will eventually very harshly punished.
Low commodity prices and aggressive cost-cutting, like selling bottling operations and factories and job reductions, didn’t helped the company to rise net income.
Main cause for revenue decline is the customers switch to more healthier drinks like juices and flavored waters. Diet coke as an alternative endured five times more sales decline because of scepticism about artificial sweeteners.
Indra Nooyi, the CEO of PepsiCo, said to investors in 2013:
“We actually believe that if you let this go too long, another three or five years, the consumer will walk away from carbonated soft drinks,”
Because of world wide soaring rates of obesity, diabetes, and other weight-related health issues, people change their beverage consumption and avoid “Liquid Candies” . As stated in Coke’s annual reports: “obesity and other health concerns” are the biggest risk to the company’s future.
Coke tries to overcome this problem by diversifying its product line, i. g.: Fuz tea, monster beverage, Zico coconut water, and the organic Honest Tea etc. But Coke’s experiments couldn’t reverse the revenue decline.
If the Coke can solve the health issues of its products then the company will begin to grow as in the past because of its wide economic moat and competitive advantages. Otherwise, the stock can endure a dramatic price decline.
No Investment or Financial Advice.