With a $235.22 billion market cap, The Coca-Cola Company (KO) is a leading beverage company that manufactures, markets, and sells various nonalcoholic beverages worldwide. It provides sparkling soft drinks, flavored and enhanced water, sports drinks, juice, dairy, plant-based beverages, tea and coffee, and energy drinks.

The company operates through a network of independent bottling partners, wholesalers, distributors, retailers, and bottling distribution operators.

Berkshire Hathaway (BRK.A) (BRK.B) CEO Warren Buffett believes in the value-based investing model and primarily opts for companies that exhibit strong fundamentals, solid earnings power, and immense potential for continued growth. He is a buy-and-hold investor, hanging on to stocks for the long term for high turnover. Buffett’s portfolio is considered a guide for several investors because of its impressive performance regardless of market conditions.

Fundamentally strong companies, such as KO, are Buffett’s top picks as they perform steadily even during an economic downturn and pay high dividends. KO is his longest-held stock. Berkshire Hathaway owns nearly 400 million shares of Coca-Cola for a market value of about $24 billion.

The company reported solid second-quarter financials, demonstrating resilience in the marketplace amid the ongoing challenges. “Our results this quarter reflect the agility of our business, the strength of our streamlined portfolio of brands, and the actions we’ve taken to execute for growth in the face of challenges in the operating and macroeconomic environment,” said James Quincey, KO’s Chairman and CEO.

Notably, KO is known for paying attractive dividends. It pays $1.76 as dividends annually, which yields 2.79% at the current share price. This compares to the 4-year average dividend yield of 3.09%. Its dividends have increased at a CAGR of 3.05% over the past three years and 3.57% over the past five years. In addition, the company’s dividends have grown for 59 consecutive years.

Shares of KO have gained marginally over the past year to close the last trading session at $54.39.

Here is what could influence KO’s performance in the upcoming months:

Solid Financials

KO's net operating revenues increased 11.8% year-over-year to $11.33 billion in the fiscal 2022 second quarter ended July 1, 2022. Its gross profit grew 2.4% from the year-ago value to $6.50 billion. The company’s non-GAAP operating income was $3.46 billion, up 8% year-over-year. Its non-GAAP net income grew 4.4% from the prior-year period to $3.06 billion.

Furthermore, as of July 1, 2022, the company’s cash and cash equivalents came in at $8.98 billion, and its current assets stood at $23.14 billion. In addition, cash inflow from operating activities amounted to $4.55 billion.

Favorable Analyst Estimates

Analysts expect KO's revenue for the fiscal 2022 fourth quarter (ending December 2022) to come in at $9.92 billion, indicating an increase of 4.8% from the prior-year period. The consensus EPS estimate of $0.48 for the ongoing quarter indicates a 5.7% year-over-year increase. The company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.

The company’s revenue and EPS for the current year are expected to grow 8.9% and 6% year-over-year, respectively. Also, analysts expect its revenue and EPS for the next year to increase 3.7% and 5.1% year-over-year, respectively.

High Profitability

KO’s trailing-12-month gross profit margin of 58.89% is 80.48% higher than the industry average of 32.63%. Its trailing-12-month EBITDA margin of 32.01% is 157.70% higher than the industry average of 12.42%. Moreover, the stock’s trailing-12-month net income margin of 23.16% is 373.46% higher than the industry average of 4.89%.

In addition, KO’s trailing-12-month levered FCF margin of 18.10% is 491% higher than the industry average of 3.06%. Its trailing-12-month ROCE, ROTC, and ROTA of 42.30%, 11.09%, and 10.27%, compare to the industry averages of 12.21%, 6.17%, and 4.63%, respectively.

Consensus Rating and Price Target Indicate Potential Upside

Of the 15 Wall Street analysts that rated KO, 12 rated it Buy, while three rated it Hold. The 12-month median price target of $67.93 indicates a 29.9% potential upside. The price targets range from a low of $62.00 to a high of $76.00.

POWR Ratings Show Promise

KO has an overall B rating, which equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree. 

KO has a B grade for Quality, consistent with its higher-than-industry profitability metrics. In addition, it has a B grade for Stability. The stock’s beta of 0.61 justifies the Stability grade.

KO is ranked #17 out of 34 stocks in the A-rated Beverages industry.

Beyond what I have stated above, we have also given KO grades for Sentiment, Growth, Value, and Momentum. Get access to all KO ratings here.

Bottom Line

KO’s growth strategy combines innovation and brand building. It primarily focuses on profit-building and enhancing shareholder value. The company offers a steady income stream through dividends. Buffett owns about 400 million shares, making KO one of the largest holdings in Berkshire’s portfolio.

Given the company’s high profitability, promising growth prospects, and solid dividend-paying record, we think it could be wise to add this Buffett holding to your portfolio now.

How Does Coca-Cola Company (KO) Stack Up Against its Peers?

KO has an overall POWR Rating of B. One could also check out these other stocks within the Beverages industry with an A (Strong Buy) rating: Carlsberg A/S (CABGY), Kirin Holdings Company, Limited (KNBWY), and Suntory Beverage & Food Ltd (STBFY).

KO shares rose $0.01 (+0.02%) in premarket trading Tuesday. Year-to-date, KO has declined -6.09%, versus a -23.32% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

More...