Coca-Cola (KO) stock experienced a slight dip on Wednesday following its impressive third-quarter earnings report. In a market environment where few investors are attracted to consumer-staples stocks, the report was a welcome win that may not only benefit the beverage giant but the broader industry as well.
For the quarter, Coca-Cola reported earnings of 74 cents per share and revenue of $11.95 billion, surpassing analysts’ predictions of 69 cents per share and $11.4 billion in revenue. Furthermore, the company now expects organic sales to grow between 10% and 11% for the full year, an increase from its previous guidance of 8% to 9%. Although the impact of exchange rates on its bottom line is expected to be more significant than initially anticipated, Coca-Cola’s forecast still implies a 7% to 8% growth in earnings per share for the year, up from the previous estimate of 5% to 6%.
Wells Fargo analyst Chris Carey sees Coca-Cola’s ability to raise its outlook despite currency headwinds as an indication that this report is more than just a regular quarter. In his analysis, Carey asserts that the company’s “all-weather” approach to foreign-exchange challenges is commendable. Accordingly, he raises his price target on Coca-Cola by $2 to $62 with an Overweight rating, noting that the stock’s resilience is often overlooked. He has confidence that Coca-Cola will continue to deliver on earnings-per-share growth next year.
Additionally, while many staples companies have experienced declines in sales volume due to cost-conscious consumers cutting back on purchases as prices rise due to inflation, Coca-Cola seems to be bucking the trend. Carey believes that Coca-Cola is one of the few staples models that can reasonably expect volume growth in the coming year.
Coca-Cola’s beat-and-raise performance in the third quarter brings a sense of optimism to a challenging market, reflecting the company’s ability to navigate obstacles and continue to thrive. With its resilient approach, Coca-Cola proves to be a promising player not only for this year but also for the foreseeable future.
Lower volumes have become a key concern in the packaged-food and beverage industry. With high interest rates, valuations, and worries about weight-loss drugs, investors are hesitant to buy into the group. Some industry experts believe that for companies in this sector to turn things around, they need to demonstrate that consumers are still willing to purchase their products despite higher prices.
Year to date, the Consumer Staples Select Sector SPDR exchange-traded fund (XLP) has experienced an 8.8% decline.
Despite the challenging environment, Coke’s recent quarter has garnered praise even from analysts who were initially skeptical. Bonnie Herzog from Goldman Sachs, while maintaining a Neutral rating on the shares, commends Coke for its top-line momentum and execution. She acknowledges the difficult circumstances and believes that Coke is positioning itself well for long-term growth that is healthy and sustainable.
Herzog also suggests that Coke’s positive quarter could have positive implications for Keurig Dr Pepper (KDP) and other companies operating in the U.S. beverage business. However, Keurig may still face challenges in its coffee segment.
It is important to note that Coke’s success is not necessarily indicative of positive change for its peers. Even if Coke’s volume growth and outlook remain outstanding within the industry, it remains to be seen if the market will view it as sufficient. This is exemplified by PepsiCo (PEP) giving up its post-earnings gains despite having a relatively positive outlook. Although Carey, a bullish analyst, has a price target just $2 above Herzog’s $60, he shares Herzog’s hesitations.
In conclusion, staples stocks as a whole may be as difficult to sell as a $9 box of cereal.