Inside Wall Street: Coke is still the one

Despite disappointing second-quarter results, thirst for Coca-Cola shares remains unquenched.

By Gene Marcial Jul 19, 2013 5:39PM
Investors who didn’t take advantage of the drop in the shares of Coca-Cola (KO) on Tuesday surely missed a rare buying opportunity in the stock. It fell from $43 a share to $40 -- after the world’ largest soft-drinks company disappointed Wall Street with uninspiring second quarterly results.


Predictably, however, the stock didn’t stay depressed for long. It rebounded to more than $41 by Friday, as the more seasoned  investment pros bought in after the stock tumbled. And Coke’s stock is likely to continue to rebound, some analysts say, and hit much higher ground to as much as $50 over the short-haul.

Part of their optimism is due to the positive track record of the stock, which has been in an uptrend since early 2011, when it was trading at $25 a share. So whenever the stock stumbles, the bulls on the stock quickly take the opportunity to buy more shares and add to their holdings. Like many other large-cap and blue-chip stocks, Coca-Cola is considered as a core long-term holding by the large U.S. institutional investors.


© Waldie/Bloomberg via Getty ImagesWith Coca-Cola among the most widely known U.S. brands worldwide, the company has collected an impressive list of institutional investors, topped by Berkshire Hathaway (BRK.A), which has a nearly 9% stake in the stock, Vanguard Group which owns 4.6%, State Street with nearly 4% and Fidelity Management with 3.5%. Other equally reputable large investors that own Coca-Cola stock as core holdings include the Gates Bill & Melinda Foundation, BlackRock Fund Advisors, Northern Trust Investments, and Bank of New York Mellon Corp.   


Analysts who track Coca-Cola have been quick to adjust and trim their earnings estimates for this year and next, because of the flat second quarter results. But while some Coke watchers turned away from the stock, if briefly, several analysts and investors continued to stay positive, if not more encouraged to buy more shares.


Analyst Esther Kwon of S&P Capital IQ, for one, is maintaining her "strong buy" recommendation on the stock, even as she reduced her 2013 earnings estimate by 2 cents, to $2.13 a share, and her 2014 forecast by 1 cent, to $2.33 a share. Nonetheless, those earnings estimates are higher than Coca-Cola earnings of $1.97 a share in 2012.


The S&P analyst expects global volume growth for the company will continue to be weak, particularly in Europe -- where volume in the quarter dropped 4% -- and in North America where volume trickled down by 1%. But Kwon has kept her 12-month price target for the stock of $47 a share, based on her analysis of price-earnings projections ahead.  


"While second-quarter results were disappointing, we expect improvement in the second half as weather normalizes," says Kwon, especially in Europe, the U.S., and India. The analyst also expects results to improve in China and Brazil, which are among the larger markets for Coke’s products.


She notes that Coca-Cola’s strategy is to utilize its brands, distribution system and financial strength to achieve long-term sustainable growth. As a result, the company has long maintained its global leadership in the soft-drinks industry, with its trademark Coca-Cola beverages accounting for 48% of worldwide case volume, and 48%, as well, of the U.S. unit case volume.   


Also remaining bullish on Coca-Cola despite the weak quarterly results is Michael J. Branca of Barclays Capital, who continues to rate the stock as "overweight/positive."


He concedes that the stock "may give up more ground and drop below the bottom end of our $40-$50 trading range in the short term," but Branca says he continues to "see value in the shares."


Apart from the stock’s attraction for its tested resiliency and long-term upward trend, the stock has also been one of the market’s top dividend plays, with a dividend yield of 2.73%. With the investment world now totally demanding increasing rewards from their stock portfolios, Coca-Cola's extra payout return adds to its long-haul allure.  

Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

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Jul 22, 2013 9:56AM

KO hasn't been at $43 for awhile. It did not drop $3 in one day.

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