COKE - Coca-Cola Consolidated: Let's Check Results Because They're Excellent I Say 'Buy'

2023-06-08 02:18:45 ET

Summary

• COKE is an attractive business in the bottling segment that I invested in over the past 24 months.
• Since my last article, the company has seen a beyond-impressive RoR of 40% and a market outperformance of 3-4x next to the S&P 500.
• I consider COKE at a "BUY" at this time, and would slightly adjust my PT to the somewhat higher direction here.

Dear readers/followers,

Some people really questioned my investing in Coca-Cola Consolidated ( COKE ) in my portfolio. This was especially true in my last article when I added shares at what seemed like a low after the company bounced up a little. But I've always said - you buy quality, you buy fundamentals, and you end up with a great portfolio that not only allows you to sleep well at night, but if you're an investor with patience and can afford not to focus #1 on income or dividends, you'll walk away with bags of cash in your hand.

So too, is the case with Coca-Cola Consolidated - which we'll see here. Take a look at the results we have since my last article on the company.

As you can see, COKE stock has 4x'ed the S&P 500 during the same timeframe, making this one of the better investments I've made in the past 5 months. Now, I did not expect for the reversal to go this fast - though I did expect it to come eventually.

Coca-Cola Consolidated - plenty to like, even at this valuation

For those of you new to this company, because it's been a while since I reviewed COKE, a quick but succinct recap. COKE is a bottler, and it's not owned by Coca-Cola ( KO ), which by the way I also own. KO does have a 5% stake in the business, but it wouldn't matter if Coca-Cola were to go bankrupt, because it would not bankrupt COKE (though it would severely impact its possibilities, margins, and markets). However, COKE is not only bottling Coca-Cola products in its 10 plants and 60 distribution centers, it also covers and assists other companies.

COKE is a business that works with the following brands and companies/products.

Now, when COKE bottles and sells a product, this typically is accompanied by exclusive bottling and distribution rights in key regions. This exclusivity of rights makes the company an attractive play because it not only manages but curates its networks, customer relations, and supply chain. What works with Coca-Cola can of course be used with a whole host of other soft drinks and products. This safety is what appeals to me about this business model.

Do not mistake COKE for a high dividend company though. The company's dividend moves at an absolute snail's pace, and it's not the type of company I invest in that often at all. With COKE also recently, as of this climb, reaching above 15x P/E on an average weighted basis, I realize that I need to justify my stance on this particular company.

So let me do just that.

COKE has one of the best margins in the entire business. Better in fact, than KO in some ways. You'll hear me comparing KO and COKE quite a lot - it's an easy comparison.

COKE has far better return margins. Its return on equity, which is considered a measure of a corporation's profitability and how efficient it is in generating profits, shows us a position in the 98th percentile in beverages. This is close to a class leader, and for the notoriously difficult beverage industry, this is something to really home in on. Its Returns on Assets invested capital and employed capital is not much less impressive, coming in at very impressive numbers.

If we look at the company's ability to generate ROIC net of its weighted average cost of capital, i.e. how efficient it is at actually investing its money in profitable projects, you'll find this company to be absolutely superb during the past few years.

It has very good debt trends, and its revenue to net profit is impressive enough. 63.3% of the company's revenues go to COGS, with another 26.4% to operating expenses, landing the company a double-digit operating income and a high single-digit net income. Neither bad nor is it the best - it's just good here.

First-quarter results were published in early May, and they were a big part of the continued climbing direction for the company. Sales increased by 12% versus YoY, with gross profit margins up significantly to almost 40%. Operational income, meanwhile, was up 57% as well, and is now over $206M on a quarterly basis, closing in on that billion worth on NTM. The company sold more in terms of money, due to price increases and efficiency.

The company reported traffic pattern changes from consumers, with the change returning to a more pre-COVID-19 sort of pattern and so-called "leisure" routines, another positive. Total shopping trips to large stores have declined because people eat out more, and this results in increased convenience retail, restaurants, and on-premise locations where, you guessed it, they can find the company's product more easily accessible. Club stores are significantly benefitting here.

Physical case volume actually declined by 3.1% on a quarterly basis, somewhat due to one day less of selling on a YoY basis. Sparkling beverages were up 0.2%, with the rest of the company's products mixed. The company saw strong sales growth in stills such as SmartWater, Gold Peak, and other products that are relatively new in the roster.

All in all, what I see is COKE's mix performing very well when it comes to historical pricing elasticities which can be said to be associated with this sort of environment.

It's a solid move into the summer selling season, and I expect continued great results from COKE. It's a reason I'm happy that my 0.6% is now at over 1% of my total portfolio value, and I have no ambition in the near term or at this price to start trimming. A 40%+ RoR in 6 months is, as I see it, only the beginning of COKE's journey here.

Risks and other things to look at here?

COKE remains BBB+ rated. Its fundamentals are absolutely stellar, though its yield is less than 0.3%. Except for no-dividend stocks, this is by far the lowest-yielding stock in my entire investment portfolio. This should tell you how much I like the company.

COKE does not hold earnings calls. It does not provide a whole lot of information. No S&P Global analysts actually follow the company or give it price targets. This is a company that's often flying under the radar quite a bit, but this is a quality I actually like in my investments. It makes it easier to find undervalued quality, and I believe that is what I have managed here.

Valuation for Coca-Cola Consolidated

So, the valuation, given that we've seen a 40% RoR since my last article, is obviously much-changed since my last article. It actually went above my previous PT of $650/share. If you know my work, you know that I do not often or lightly change my price targets. However, I also stated clearly that my target is a 20x P/E long-term target - that is still the case.

We're not currently anywhere near a 20X P/E premium. The company has new forecasts with its results, delivering 2022A EPS growth of 51.44% on an adjusted basis. This is nothing I would consider the company being able to keep, let me clarify that. I expect the company to see a significant decline - at least 10-15%, probably upwards of 20% this year. FactSet expects 20-21%, though it's only from a lone analyst, such as myself. Beyond that, we're likely to see stabilization of sales growth, at a mid-to-somewhat high single-digit sales growth and EPS from thereon.

A 19-20x P/E rating comes to around $800/share under those targets. While I won't be bumping my PT to $800/share to reflect this new 20x P/E reality, I will be bumping it to around $690/share, which implies at least 17x P/E. I believe at a projected double-digit EPS decline, there is room for the company to stop reverting at this time, and instead go relatively flat, though I still see the potential for the company to get up to that $700/share on the back of strong summer sales.

Also, note that COKE has a bona fide history of actually outperforming analyst expectations by a massive 42% of the time, which shows us that that lone analyst has a hard time of really forecasting what COKE does and does not do. He/She forecasted the entire last 4 years wrong, having COKE outperforming forecasts by 115%, 73%, 76%, and 36% respectively. We'll see how that goes this year.

COKE "plays" in a difficult, low-margin sector. Any premium needs to be well-explained here, for if it is not well-reasoned, it has no justification to exist. Coca-Cola is the biggest player at a $260B market cap, with PepsiCo ( PEP ) at $250/share. After that, it's a far drop to Monster at $60B, Keurig Dr Pepper ( KDP ) which I also cover and invest in, and a few others. There are plenty of Coca-Cola bottlers on the list as well, and COKE is one of the smaller ones of them, with a market cap of around $6.3B.

All in all, I still like COKE here. The investment has come a long way, and based on my previous PT ignoring P/E, it actually delivered what I said it would in my PT. But I do not believe the company is yet done, and that is why I'm sticking to my shares and instead increasing my PT somewhat. The new PT for COKE is $690/share, which gives us at least a slight future upward potential. I believe this to be realistic, and for that, here is my thesis.

Thesis

• COKE is an advantageous soft drink/beverage investment with bottling and manufacturing capacity across 5 attractive US regions. This makes the company a "guaranteed cash cow", "with exposures to things like input inflation, CapEx, and risks associated with companies like this - including customer concentration.
• However, the company has a superb track record of delivering value to its shareholders, almost quadrupling KO 20-year returns, and is well managed, even if its dividend leaves something to be desired.
• After outperforming in 2022 and a 40% ROR since my last article, I am now bumping my price target on this attractive bottler.
• At a premium, I still view COKE as a worthy "Buy" with a 17X P/E long-term target, indicating a PT of $690/share. I refuse to shift my PT down here - I view the trends as longer-term noise.
• Because of that, I'm going with a "Buy" here as of June of 2023.

Remember, I'm all about:

1. Buying undervalued - even if that undervaluation is slight and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.

3. If the company doesn't go into overvaluation but hovers within a fair value or goes back down to undervaluation, I buy more as time allows.

4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/reversion.

COKE fulfills every single one of my investment criteria except that I can no longer in good conscience call it cheap.

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