1Q16 Results Hurt Coca-Cola’s Valuation
Why Coca-Cola Stock Fell after Better-than-Expected 1Q16 Earnings
Current valuation
Coca-Cola’s (KO) 12-month forward PE (price-to-earnings) multiple fell by 4.7% to 22.4x on April 20, as the company reported weak organic revenue growth and flat soda volumes in 1Q16. Overall, Coca-Cola’s valuation multiple has appreciated by 7.1% since the start of 2016.
Comparison with Peers
Coca-Cola is trading at a higher valuation multiple compared to fellow soda makers PepsiCo (PEP) and Dr Pepper Snapple (DPS). As of April 20, PepsiCo and Dr Pepper Snapple were trading at forward PEs of 21.3x and 19.9x, respectively. These three companies together account for 3.2% of the iShares Russell 1000 Growth ETF (IWF).
Analysts expect Coca-Cola’s fiscal 2016 revenue and adjusted EPS to decline by 3% and 2%, respectively, as currency headwinds continue to weigh on the company’s performance. Analysts expect PepsiCo’s revenue to remain flat in fiscal 2016 and adjusted EPS to increase by 3%. Dr Pepper Snapple’s fiscal 2016 adjusted EPS is expected to grow by 7% on a 2% expected growth in revenue. Overall, softness in carbonated soft drink values will likely continue to put pressure on the performance of nonalcoholic beverage companies.
Monster Beverage (MNST), in which Coca-Cola has a 16.7% stake, was trading at a forward PE of 31.5x as of April 20. Analysts expect Monster Beverage’s fiscal 2016 revenue to rise by 11% and adjusted EPS to increase by 29% due to strong demand for energy drinks in the domestic as well as international markets.
Growth prospects
As discussed in part three of this series, Coca-Cola’s still beverage volumes are growing at a faster pace than its sparkling beverages as consumers around the world are cutting back on their soda consumption. In order to address the rising obesity and diabetes rates, many countries have either implemented or are contemplating the idea of imposing a soda tax to bring down soda consumption. For instance, in March 2016, the UK government announced its plans to implement a special tax on sugar-added drinks in 2018.
In this scenario, Coca-Cola needs to further strengthen its still beverage portfolio to capture growth in categories like ready-to-drink tea, bottled water, and sports drinks. The company has already made some strategic acquisitions in this direction, including the purchase of a 30% stake in Suja Juice in August 2015 and the January 2016 acquisition of a minority stake in Chi Limited, Nigeria’s leading dairy and juice company.
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