Historically, periods of severe stock market turbulence have proven to be good times for investors with a longer-term time horizon to focus on the highest-quality and financially strongest names, notes analyst Chris Graja of Argus Research, a leading independent Wall Street research firm.
We believe that Coca-Cola (KO) is one of these companies. The company has increased the dividend for 58 consecutive years.
To be sure, even high quality consumer companies are not immune to disruption from COVID-19. Coke has seen a significant decline in sales of beverages through restaurants, amusement parks, sporting events and schools.
Volumes at grocery stores have risen, but not enough to make up the difference with so many 'away-from-home' locations closed or operating with limited take-out service.
While we do not expect Coke to meet its initial 2020 financial guidance, we believe that earnings will bottom in 2Q20 and begin to improve as economies reopen.
We are reducing our 2021 EPS estimate to $2.15 from $2.25 based on a lower sales forecast. After the COVID crisis, we expect the company to grow earnings at a compound annual rate of 8% for a few years.
KO's sales goals are to enhance sales of dominant products (greater than 20% value share), boost sales of 'challenger' brands that are prominent but not the leader in their category (10%-20% share), and launch new 'Explorer,' brands.
Important categories outside of 'sparkling' or soda, include energy drinks; juices and smoothies; water and sports drinks; and coffee and tea. Coke has an opportunity to add to its low market share in non-soda categories which are generally growing faster.
Management has recognized that it needs to diversify revenue away from sugary soda and we expect it to make progress toward this goal. KO increased the percentage sales from new products to 23% in 2019 from 17% in 2018 and 9% in 2015.
The company has also been looking at mergers and acquisitions to boost sales. We are maintaining our "buy" rating and our price target of $54.
