22 BARRON’S October 26, 2020
L
ong before people
started talking
about globaliza-
tion,Coca-Cola
was living it. Coke
is in more than
200 countries and
for many decades has had a
global reach like no other con-
sumer company. And when the
world starts to get back to nor-
mal in 2021, the soda giant will
be poised to rebound along
with it.
As a postpandemic “reopen-
ing” play, however, shares of
Coca-Cola (ticker: KO) seem
to be underappreciated. The
stock has lagged behindPepsi-
Co(PEP) andProcter &
Gamble(PG) this year.
It shouldn’t. More than those
consumer peers, Coke benefits
from rising living standards
in the developing world. And
Coke provides exposure to a
weaker dollar because the com-
pany generates about 75% of
its profits outside the U.S.
Investors are also overlooking a
great operational turnaround story.
Under its dynamic CEO of the past
three years, James Quincey, Coke has
largely sold off its company-owned
bottling operations to franchisees,
resulting in a capital-light business
model with strong free-cash-flow
generation.
“The beverage industry is a growth
industry, and we are the market share
leader not just in soft drinks, but also
in other major categories, and we are
gaining share,” Quincey tellsBarron’s.
The pandemic and its restrictions
have hurt Coke, which gets about half
of its sales from restaurants, cafete-
rias, stadiums, and other places and
events outside the home. Quincey is
optimistic, however.
“I believe the away-from-home
[market] will come back if one is
worried about the short term,” he
says. “We are social animals. We love
to mix and mingle and love to have
experiences. That willcome back, and
Coke is pre-eminently positioned to
benefit from the recovery from the
pandemic, given the long-term posi-
tive trends in the beverage industry
and our position as the leader.”
The CEO wants Coke to be bolder
and better attuned to innovative
beverages, including energy drinks
and coffee-linked products, and
more aggressive in culling “zombie”
brands—as it recently did with Tab,
the diet soda introduced in 1963—
while continuing to expand its core
soft-drink franchise.
The Covid-19 crisis has heightened
Coke’s focus on these issues, with the
company weighing the elimination of
half of its 500 brands worldwide.
“Coke is a great recovery play going
into 2021,” says Lauren Lieberman, an
analyst at Barclays. “Coke is using this
period to accelerate operational and
strategic change that should allow the
company to come out more profitable
and with faster growth than before
Covid.” She has an Overweight rating
and $59 price target on the shares.
The stock, at around $50, is off 8%
in 2020, and carries a bond-like yield
of 3.2%, nearly double that of the S&P
500 index.
The annual dividend of $1.64 a
share looks safe, despite a high payout
of earnings. The dividend has been
raised for 58 consecutive years, and
is likely to increase in coming years,
adding to the appeal of the stock.
Morgan Stanley recently identified
Coke as a “mispriced” reopening
stock. The company’s “long-term top-
line growth outlook is above peers’,
with strong pricing power and favor-
able strategy tweaks under Coke’s
relatively new CEO, including in-
creased innovation and a cultural shift
toward a total beverage company,”
wrote Morgan Stanley’s beverage
analyst Dara Mohsenian.
Still, the shares aren’t cheap, trad-
ing for about 24 times projected 2021
earning of $2.09 a share. Coke critics
call it a no-growth “growth” stock,
given that earnings have been stuck
around $2 a share for the past decade.
Yet profits could be set to finally
break out. Credit Suisse analyst
Kaumil Gajrawala sees $2.70 in
2023 earnings—15 cents above the
consensus— andthinks that the stock
could hit $70 then. The analyst has
an Outperform rating on Coke, with
a $57 price target. “The business was
fundamentally restructured and
showing momentum pre-Covid, and
while the improvement has been
delayed, it has not been derailed,”
Gajrawala says.
Coke targets 7% to 9% annual
growth in earnings per share, and
Gajrawala thinks the company can
beat that goal coming out of 2021.
A strong dollar has dampened
Coke’s profits; currency translations
are expected to have a high-single
digit impact on 2020 earnings after
an eight-percentage point hit last year.
But should the dollar weaken, few
large companies would be bigger
beneficiaries than Coke.
The soft-drink titan had strong
“Coke is one
of the best-
positioned
companies
in a world
of disruption.”
Jason Subotky, a portfolio manager at Yacktman Asset Management
Still the Real Thing
Coca-Cola faces many challenges, but it remains the market leader in the U.S. beverage market.
0
20%
U.S. MARKET SHARE BY VOLUME TOP BEVERAGE BRANDS
15
10
5
Source: Beverage Digest
Pepsi 5.9
Mountain Dew 4.3
Dr. Pepper 4.2
Gatorate 3.7
Sprite 3.5
Nestle Pure Life 3.0
Dasani 2.4
Aquafina 2.1
Poland Spring 2.1
13.7%
17.9%
7.8% 7.5% 7.3% 7.2%
6.1%
3.5%
2.6%2.4%
1.7%
Coke
Coke Pepsi Diet
CokeDr. Pepper Sprite Mountain
DewDiet
PepsiFanta Coke
ZeroCanada
Dry