The Post-Earnings Drop of Coca-Cola Stock Is a Buying Opportunity

Coca-Cola (NYSE:KO) stock dropped sharply yesterday after the consumer-staples giant reported fourth-quarter numbers that were largely in-line with expectations. But KO also issued cautious guidance for fiscal 2019 which seemed to incorporate slowing global economic trends and persistent foreign-exchange headwinds, causing KO stock to decline from $50 to $45.

KO stock was trading right near its all-time highs heading into the Q4 print. But its results were pretty good, as its organic sales rose 5% and its operating profits rose 11%.

In that context, the decline of Coca-Cola stock looks like a buying opportunity. Everything is still going well for KO. The company is continuing to pivot from a soda-focused brand to a multi-beverage brand that is much more relevant to today’s health-conscious consumers. That transition is powering consistent, healthy revenue growth.

Meanwhile, KO has exercised disciplined cost control, pushing its margins higher. The result of these trends is healthy, steady revenue and profit growth.

This healthy, steady top-line and bottom-line growth will ultimately power Coca-Cola stock higher. KO stock was trading at a premium valuation heading into the print, supported by unreasonably high expectations. Now expectations are lower, and Coca-Cola stock is cheaper. Thus, now is the right time to buy KO stock.

Q4 Numbers Were Good, But Not Great

Coca-Cola’s Q4 numbers were good. But they weren’t great or anything special. Instead, they were more of the same stable revenue and profit growth that this company has reported over the past several quarters and years.

Thus, in the big picture, Coca-Cola’s top-line growth trajectory has largely stabilized around 4%, excluding acquisitions. The problem was that, when KO stock was around $50, some investors were hoping that 5% and up sales growth was the new norm. That isn’t the case. Fiscal 2018 was just an unusually good year. Next year (and likely for the foreseeable future), organic sales growth  (i.e. excluding the impact of acquisitions) will be in the 3%-5% range.

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Meanwhile, excluding currency fluctuations, operating income rose 8% in the quarter, and 11% on a trailing-twelve-month basis. That is fairly consistent with what KO has reported over the past several quarters. This low double-digit percentage-operating-profit-growth-trajectory is projected to persist, too, as KO expects its operating profits to rise 10%-11% in 2019.

Overall, KO’s fourth-quarter numbers and its 2019 guidance underscore that Coca-Cola’s growth outlook is stable, but largely below the company’s 2018 results. That disappointed some investors who had bought KO stock last year.

Coca-Cola’s Long-Term Outlook Is Healthy

In the big picture, the long-term fundamentals of Coca-Cola remain healthy. All the post-earnings drop did was make Coca-Cola stock cheaper while showing that KO’s fundamentals remain strong. Consequently, this dip of Coca-Cola stock is a buying opportunity.

Coca-Cola has made a big shift over the past several years, transforming from a soda-focused brand with declining popularity and relevance to a multi-beverage brand with climbing popularity and relevance. As part of this transition, the company has added new iterations like Zero to the core Coca-Cola product lineup, while broadening the product portfolio to include a wide range of teas, coffees, sparkling drinks, and enhanced waters that resonate with today’s health-conscious consumers.

This pivot is working. It’s driving consistent, steady mid-single-digit, organic sales growth. In tandem with management’s cost control measures, the transformation is driving high-single digit percentage to low-double-digit-percentage operating-profit growth.

None of the company’s fundamentals has changed in the wake of its Q4 results. The company’s organic revenues are expected to rise 4% in fiscal 2019, while its operating profits are expected to rise just over 10%.

The only thing that has changed is the valuation of Coca-Cola stock. Heading into the print, KO stock was trading at nearly 23 times analysts’ forward earnings estimate with a sub-3.2% dividend yield. Relative to historical standards, that’s a big P/E multiple and a low yield for KO stock.

Now, though, the valuation of Coca-Cola stock is much more “normal”. Its forward multiple is back around 20, which is roughly in-line with its average valuation over the last five years. The dividend yield has risen to 3.4%, above the average yield of KO stock over the last five years. Meanwhile, KO is still poised to deliver mid-single-digit-organic sales growth and grow its operating profit by about 10%.

As a result, the decline of Coca-Cola stock is a buying opportunity. KO’s fundamentals remain largely unchanged, while KO stock just went from slightly overvalued to slightly undervalued.

The Bottom Line on Coca-Cola Stock

In the big picture, Coca-Cola has a found a winning strategy: Acquiring relevant, popular brands, and distributing them around the globe. As long as this strategy continues to power mid-single-digit organic sales growth and operating-profit growth of about 10%, KO stock should be bought on dips.

As of this writing, Luke Lango was lo