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After a Rough Year, Things Are Looking up for Coca-Cola Stock

InvestorPlace logo InvestorPlace 10/27/2020 Divya Premkumar
a close up of a bottle and a glass of beer on a table: coca-cola (KO) bottles and cans. coke is a blue-chip stocks © Source: Fotazdymak / Shutterstock.com coca-cola (KO) bottles and cans. coke is a blue-chip stocks

Coca-Cola (NYSE:KO) is a household name in the beverage industry with a presence in 200 countries and 500 brands under its umbrella. That didn’t make Coca-Cola stock immune to the effects of the global pandemic and lagged during the first half of 2020.

a bottle of beer on a table: coca-cola (KO) bottles and cans. coke is a blue-chip stocks © Provided by InvestorPlace coca-cola (KO) bottles and cans. coke is a blue-chip stocks

It looks as if the beverage giant has a solid comeback plan, though. Coca-Cola will pivot its business and adapt to the new normal.

Coke is constantly working on rethinking its product category with a strong focus on innovation. The company also announced a new restructuring plan which will make a strong comeback in the next few months. In its most recent earnings, Coca-Cola beat analyst estimates by a strong margin. All these factors make KO stock a strong buy in my books.

An Impressive Q3 for Coca-Cola Stock

There was a lot of optimism in Coca-Cola’s Q3 earnings despite a 9% decline in revenue. The company beat analyst estimates sending its stock up by 2% in pre-market trading. The drop in its revenue numbers can be attributed to the low sales in soft drinks, Dasani and Powerade this year.

As reported by CNBC, revenue for the quarter ended was $8.65 billion versus an estimated $8.36 billion. Earnings per share (EPS) was 55 cents compared to the estimated 46 cents.

However, net income was down to $1.74 billion from $2.59 billion in 2019. While these numbers are nowhere near its pre-pandemic levels, Coke reports that there is a quarter-over-quarter improvement.

It is also worth noting that a large percentage of Coke’s revenue comes from global sales. Only 20% of its revenue comes from developed nations.

Sales were down this year largely due to the restrictive measures in place worldwide. And with the second wave of the pandemic underway, some countries have announced lockdowns. But owning a large slice of the global market also means that KO stock has room for a lot of growth.

Coca-Cola’s Q3 earnings hint at better days ahead. Together with its new restructuring plan, Coke is well poised for a rebound.

Rethinking Its Business Model

Coke is a legacy brand in the beverage industry, but despite its historical significance the company needs to keep with the times in order to stay relevant. This is exactly what Coke’s dynamic CEO, James Quincy, hopes to do.

For large conglomerates, diversification is the name of the game for long-term growth. In an effort to expand its operations outside drinks, Quincy made the decision to franchise its bottling operations. This translates to low capital costs giving the company more freedom to generate larger amounts of cash.

While this is a great strategy pre-Corona, the pandemic forced Coke to find more innovative ways to restructure the business and stay afloat.

On August 28, the beverage giant announced that it would downsize its 17 business units to just nine. The new units will not include its bottling plants and global ventures which will operate as external entities. The newly formed organization referred to as Platform Services will provide operational and data support.

This emphasis on data collection is to further downsize the brand in the coming months. Coke plans to focus on only half its brands since these make up 98% of its total revenue. In addition to this, there will be layoffs- both voluntary and involuntary.

Ultimately, Coca-Cola plans to operate a more lean business with a greater focus on the entities that generate the most cash flow.

While this was ultimately the company’s long-term goal, the pandemic has forced it to accelerate its plans. Bur despite the scale of its internal changes, KO stock is expected to maintain its annual dividend of $1.64. This makes the stock an appealing buy in today’s volatile market.

The Bottom Line on Coca-Cola Stock

Coca-Cola has become a go-to drink in any social environment so it’s safe to say that few companies were worse hit by the pandemic. As restaurants, theatres and other entertainment avenues remain closed, Coke is likely to feel the heat. But with that said, the plans to restructure its model will do wonders for its share price.

Moreover, as people return to their social lives in a post-pandemic world, Coca-Cola stock will see an inevitable rebound. Although the timeline on this is unclear, investors can see this price dip as a great buying opportunity before further upside.

On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.

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