Coca-Coca stock (NYSE: KO) currently trades at $53 and is still down 4% so far this year. It traded around $60 pre-Covid in February 2020 and is more than 11% below that level. However, the stock has gained 42% since its March lows of $37, following the Fed’s stimulus package and measures announced by other economies. Despite the recent healthy growth, we believe that the stock still has a marginal upside from its current level driven by expectations of rising demand and easing of supply constraints following the gradual lifting of lockdowns. However, the recent spike in Covid-positive cases will stop the company from seeing a full recovery to pre-Covid levels any time soon. Our conclusion is based on our detailed comparison of Coca-Cola stock performance during the current crisis with that during the 2008 recession in our dashboard analysis.
2020 Coronavirus Crisis
Timeline of 2020 Crisis So Far:
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- Since 3/24/2020: S&P 500 recovers 64% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
In contrast, here’s how Coca-Cola and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
Coca-Cola and S&P 500 Performance During 2007-08 Crisis
We see KO stock declined from levels of around $29 in September 2007 (pre-crisis peak) to levels of around $20 in March 2009 (as the markets bottomed out), implying KO stock lost 29% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of about $29 in early 2010, rising by 40% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.
Coca-Cola Fundamentals Over Recent Years
Coca-Cola Revenues declined more than 15% from $44.3 billion in 2015 to $37.3 billion in 2019, primarily led by refranchising (franchise owners record revenues from bottling plants, while Coca-Cola earns fees from these franchisees) of its bottling plants. However, with bottling being a low-margin business, the refranchising of it led to a rise in margins and thus earnings went up from $1.69 per share in 2015 to $2.09 in 2019. However, revenues declined 13.5% y-o-y while earnings dropped 8.7% y-o-y in the first nine months of 2020 due to the impact of the pandemic.
Does Coca-Cola Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
KO’s total debt increased from $33 billion in 2015 to $39 billion in Q3 2020, while its total cash decreased from around $13 billion to $11.4 billion over the same period. The company generated over $6.2 billion in cash from its operations in the first nine months of 2020, which puts it in a reasonably comfortable position to deal with the current crisis.
Phases of Covid-19 Crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment
Despite the recent surge in the number of new Covid-19 cases in the U.S., we expect continued improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 results, we believe The Coca-Cola Company stock has the potential for some gains once fears surrounding the Covid outbreak are put to rest, though full recovery looks unlikely anytime soon.
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