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Should You Buy the Dip in Coca-Cola?

In terms of soda, Coca-Cola (KO) is the household name. As customers become more health conscious though, the company has moved into other beverages. It's stock has shown recent weakness. Should you buy on the dip? Read more to find out.

Coca-Cola (KO) is likely to remain a household name far into the future for reasons aside from its addictive sugary soda. KO has branched out into the non-alcoholic beverage industry, sports drinks, coffee, energy drinks, sparkling water, regular water, and beyond. KO is raking in cash from all different revenue sources, yet most people aren't aware that there is a common misconception that the vast majority of KO sales stem from Coca-Cola soda. Even if society gradually phases out KO's unhealthy soda, the company will still prove successful thanks to its diverse revenue streams.

KO by the Numbers

KO was trading at $60 before the pandemic. The stock dipped down to $54 in late February, shot right back up to the high $50s, and fell off a cliff down to $37.56 in late March. KO bounced right back to life, hitting $49 by early April. The stock has primarily moved sideways in the months since, trading between $45 and $55. However, KO recently dipped from $54 on the final day of the year, sliding down to $50.

Analysts have high hopes for KO, setting an average price target of $56.33 for the stock, indicating a potential 12% upside to go. Of the dozen analysts who cover KO, five advise buying, seven recommend holding, and none insist on selling. KO has a forward P/E ratio of 24.40. The stock is currently trading $10 below its 52-week high of $60.13. KO provides an attractive dividend of 3.21%.

Why did KO Drop?

KO's recent drop is attributable to pessimism from analysts. Though one respected analyst raised his price target on KO in early January, another analyst downgraded the stock. The contrasting opinions did not bode well for KO, causing the stock to slide about 8%. To be clear, both analysts have set price targets for KO above the price it was trading at. The stock was priced at $54 at the time of its significant decline, yet the analysts' price targets for the stock were $55 and $57. Though the pandemic has hurt KO sales in restaurants, stadiums, theaters, and other venues, the company also generates revenue through in-store purchases.

The bottom line is KO has a solid global distribution network, a proven business model, and loyal customers. Add in the fact that KO refuses to rest on its laurels, opting to expand its retail products, and investors have all the more reason to feel good about the stock. KO executives have demonstrated they are more than willing to drop their underperforming brands, slash jobs, and do whatever else is necessary to maximize profitability. As an example, KO leaders decided to eliminate around 50% of its 500+ brands, including Tab, a beverage line that had been around for several decades. In addition to ending Tab, KO also stopped selling its Zico coconut water line and Odwalla juice.

Focus on the Long-term

It is no secret that 2020 was a challenging year for KO. The company's operations were disrupted as entertainment venues, and restaurants closed or cut back on operations. However, 2020 was an enigma in all regards. Most restaurants should be back in business by the spring or summer, meaning KO's operations will return to normal.

Even if many restaurants and other entertainment venues are closed for good, they will be replaced, likely within a year or two, and those new venues are likely to sell KO products. Add in the fact that KO is a powerhouse in the non-alcoholic drinks market, and there is even more reason to be enthusiastic about the stock. This market is likely to have a compounded yearly growth rate of around 7% across the next half-decade, helping KO reach new heights.

The Verdict

There are good arguments to be made both for and against KO as an investment. When in doubt, check the POWR Ratings. KO has an "A" grade in the Trade Grade component and a "B" grade in the Industry Rank and Buy & Hold Grade components. Of the 44 publicly traded companies in the Beverages industry, KO is ranked 14th. These numbers should be interpreted as an endorsement for KO to buy on the dip.

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KO shares fell $0.05 (-0.10%) in premarket trading Wednesday. Year-to-date, KO has declined -8.86%, versus a 1.19% rise in the benchmark S&P 500 index during the same period.



About the Author: Patrick Ryan

Patrick Ryan has more than a dozen years of investing experience with a focus on information technology, consumer and entertainment sectors. In addition to working for StockNews, Patrick has also written for Wealth Authority and Fallon Wealth Management.

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