Drink maker Coco cola (KO) has been doing well for quite a while. The stock took quite a bit of punishment earlier this year, and while certainly warranted given the conditions, it appears to me that the recovery appears to be enough to support the late-day buying we saw .
I have annotated this chart more often than I usually do because I believe we are looking at creating a breakout.
If we look at the period from June to the end of August, we can see that the stock has formed an ascending triangle, on top of which is $ 48 / $ 49. The breakout occurred in late August and the stock went up to ~ $ 52. Since then there has been a period of consolidation, but if we look to the right of the chart, we can see the formation of another ascending triangle.
There is trendline support (blue arrow), which is catching up late in late June, and has been higher in recent weeks. While there may be one or two more connect points along the trendline, I believe we are about to see Coca-Cola above the $ 52 level and make a run at a pre-pandemic high.
The good news is that if the ascending triangle pattern fails, there is strong support at the pre-breakout level of ~ $ 48, which is also annotated above. So, I think you’ve got some clearly defined parameters for this one and you’ll soon find out if a breakout is happening.
Earnings support bulls
Coca-Cola reported Q3 earnings only a few days earlier, and results were weaker than last year. Of course, it is expected that places far away from home for Coca-Cola will remain incredibly vulnerable. This segment includes things like movie theaters, sports stadiums, and other places where people normally congregate in large groups, but are not allowed to. This is, of course, as anyone anticipated when this segment would return to normal, but Coca-Cola is proving that its vast diversity can help it flourish in any environment, including epidemics.
Source: Q3 Earnings Presentation
What I think is most telling of the company’s results is that case volumes are not down or that pricing and mixing in Q3 were a headwind; Neither of those things are positive in any way. However, we knew that Q3 will become ugly has not raised the status of the epidemic.
I think the impressive thing about Coca-Cola’s performance is that it managed a 7% increase in adjusted operating income while organic revenue was down 6%. Generally, if organic revenue is underperforming, margins follow suit due to fixed and operating cost deviations. Coca-Cola’s intense focus on margin improvement in recent years is booming in 2020, and its expansion is that when revenue eventually recovers, operating revenue from that revenue should be eligible.
It is very easy to believe that Q4 will be bumped up as well as the management said that October was a tough start. But as we look forward to 2021, and the channels away from home begin to reopen in Bayana, Coca-Cola stands to benefit immensely.
When you talk about improving organic revenue with a never-ending push for Coca-Cola’s innovation in 2021, I think the future is bright. Coca-Cola’s strategy has long been centered around the expansion of current products, such as flavored coke and diet coke lines. In recent years, however, it has shifted to coffee with its Costa acquisition, and in selling alcoholic beverages in the US for the first time with its Topo Chico brand. Coca-Cola is late to the hard salter party, but its marketing and supply chain could collectively give other players a major advantage in the space.
To be fair, management has come to the forefront about the fact that recovery is likely to stop and begin. Given the vast geographic reach of Coca-Cola’s revenue globally, this is understandable. Various countries are still in initial lockdown, while others are coming to a new normal among them. Actually, we in America are seeing the same thing in different cities and states.
This would lead to uneven performance for Coca-Cola, so don’t expect straight line retrieval back to the top. This will be a process, but the important thing is that the pieces are in place for recovery, and the initial signs are quite good.
I am obviously sharp on Coca-Cola these days for all of the above reasons. The good news is that I think you might get a chance for Coca-Cola, as it is a very attractive valuation. Allow me to explain.
Source: Alpha Demand
Shares trade at 24 times next year’s earnings, which should be done more or less. The good news is that the stock’s five-year average forward PE ratio falls to 24, so Coca-Cola is essentially a general valuation.
The thing that makes it compelling is that income has not increased much in the last few years. Coca-Cola has struggled to move the needle on EPS, but traded at 24 times earnings anyway. Today, if we look at the growth numbers above, the company is in a much better position from a growth perspective, so one should trade for more valuations for better growth prospects. Actually, stocks are traded at close to 30 times the earnings before the pandemic seller, so this type of thing is not without precedent.
With Coca-Cola’s focus on operating margin gains, continued product innovation, and a far-from-home recovery on the horizon, I see plenty of reasons to grow faster. Also, the stock is set up very fast from a technical standpoint, so I think it’s a buy.
Disclosure: I / We do not have a position in any of the stocks mentioned, but may initiate a long position in KO within the next 72 hours. I wrote this article myself, and it expresses my own opinion. I am not getting compensation for this (other than Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.