Coca-Cola (NYSE:KO) Q2 results suggest that it can bubble to new highs in 2023, but there is at least 1 headwind for the market that could keep it from moving higher. The analysts. 13 of whom rate the stock a firm Moderate Buy, aren’t gushing with excitement, and their price target activity is unlikely to spur a rally.
- The Coca-Cola Company had a stellar quarter, showing pricing power is strong.
- Adjusted margin improved YOY and led to solid results on the bottom line.
- The earnings guidance was raised and may lead the analysts to raise their targets.
At least not yet. The analysts have yet to come out with revisions following the release; when they do, it will set the tone for the next few months. As it is, their price target is only 8% above the stock price action, which is little incentive for investors looking for returns this year.
The Coca-Cola Has Strong Quarter: Pricing Power Is Evident
The Coca-Cola Company had a solid quarter with strength in all regions. The company reported $12 billion in net revenue for a gain of 6.2% compared to last year, beating the consensus by 210 basis points. The gain was driven by flat case volume, a 1% increase in concentrated, and a 10% contribution from price/mix offset by FX headwinds.
Organic growth came in at 11%, with Latin America up 25%, the EU and North America at 9%, APAC at 5%, Global Ventures at 10%, and Bottling Investments at 15%.
The margin news is mixed with GAAP margin contracting and adjusted margin expanding. GAAP margins contracted due to FX headwinds and 1-offs related to growth and repositioning.
The adjusted operating margin improved by 90 basis points to 31.6% to help leverage the top-line strength. The adjusted EPS of $0.78 is up 11% compared to last year, beating the consensus by $0.06, playing into management's decision to increase the guidance.
The guidance has a cautious tone and does not include specifics for Q3, but it does include upward revisions for the year. The company expects organic revenue growth in the range of 8% to 9%, with EPS growth in the range of 9% to 11%. That puts adjusted EPS at $2.70 at the low end, above the consensus target. This should get the analyst to up their EPS targets; it may spark some upward price target revisions.
The Coca-Cola Company Capital Returns; Dividend Growth
The Coca-Cola Company generated $4 billion in FCF on a YTD basis. This is down slightly from the previous year but sufficient to maintain a solid balance sheet and pay dividends. The company is a Dividend King, so there is a high expectation for sustained annual distribution increases.
The problem is that The Coca-Cola Company is a mature Dividend King paying out 70% of its earnings. It can sustain dividend increases, but there is a limit to how long and what pace they will come. The distribution CAGR is running at 3.5%, which isn’t enough to offset inflation in 2023; competitor PepsiCo (NASDAQ:PEP) is in similar shape but able to grow its dividend by more than the pace of inflation for a similar valuation.
Other stocks in the consumer staples sector offer even better yields at deep-value pricing.
Institutional interest in KO shares supports the action and may help it sustain current levels, if not higher. The institutions own nearly 70% of the stock and have been buying at a pace of 2:1 compared to selling.
This is consistent with the $60 support level, which is the critical support line. A move below that level could lead to a significant correction in the stock price. So long as it holds, the market should continue to move sideways, if not drift higher. A move higher may depend on the analysts; if they begin to hike their price targets again, the market should follow them higher.
