The Coca-Cola Company (NYSE: K.O.) shares have advanced more than 15% since October 10, 2022, and the current price stands at $62.20.
Coca-Cola reported strong third-quarter earnings results in October, but rising interest rates, a darkening macro backdrop, and higher input costs could put pressure on Coca-Cola shares in the upcoming weeks.
Coca-Cola could increase its presence in the alcohol space
The third quarter of 2022 was quite positive for Coca-Cola, and the company reported revenue and profit higher than analysts’ consensus estimates.
Total revenue has increased by 11% Y/Y to $11.1 billion, which was $600 million above expectations, while the Non-GAAP earnings per share were $0.69 (beats by $0.05).
Organic sales were up 16% during the third quarter, and it is important to note that Coca-Cola expects to deliver organic revenue growth of 14% to 15% for the full fiscal year 2022.
Coca-Cola continues to evolve under CEO James Quincey, and according to the premier global independent investment banking advisory firm Evercore ISI, the beverage giant’s next big move may be to increase its presence in the alcohol space. Analyst Robert Ottenstein from Evercore ISI said:
The alcohol space is a clear area that would help Coca-Cola drive its goal of doubling the number of customers over the next ten years and reach its top-line goal of 4% to 6% growth.
Although the company has a strong market position and high pricing power, Coca-Cola shares are not undervalued, and the current dividend yield of 2.8% doesn’t seem attractive enough to accept the current risks connected with rising interest rates, a darkening macro backdrop and high input costs.
Investors continue to worry that an aggressive Federal Reserve will push the economy into a deep recession that could dent corporate earnings and stock markets.
The federal funds rate is now in a range of 4.25% to 4.5%, which is the highest level since 2007, but inflation remains well above what the Fed thinks is consistent with a stable price.
High inflation indicates that the U.S. central bank has more work to do, and the U.S. stock market is likely to experience some turbulence in the nearer term.
Now let’s take a look at fundamentals. With a price-to-earnings (or “P/E”) ratio of 25.2, Coca-Cola is on the pricier side of the market, given that many companies on the U.S. stock market currently have P/E ratios under 15.
According price-to-sales ratio (market capitalization/revenues), Coca-Cola shares are trading at 6.42, which is more than two times higher than the price-to-sales ratio of PepsiCo, Inc. (NASDAQ: PEP), which is trading at a P/S of 2.98.
Coca-Cola trades at more than twenty times TTM EBITDA, while PepsiCo trades at sixteen TTM EBITDA. To justify its current valuation, Coca-Cola would need to produce outstanding growth well in excess of the market, which will not be easy.
Technical analysis
The Coca-Cola Company shares have advanced more than 15% since October 10, 2022, but the price has moved again below the 10-day moving average.
This could indicate that the price could fall again below $60, and potential investors should keep in mind that if the U.S. stock market enters a more significant correction phase, the share price could be at much lower levels.
Data source: tradingview.com
The first support level stands at $60, while $70 represents the important resistance level. If the price falls below $60, it would be a “sell” signal, and we have the open way to $55 or even below.
Conversely, if the price jumps above $65, the next target could be resistance at $70.
Summary
Coca-Cola shares have advanced more than 15% since October 10, 2022, but investors should keep in mind that Coca-Cola shares are not inexpensive at the current price. The current dividend yield of 2.8% also doesn’t seem attractive in the current economic situation, where the U.S. Federal Reserve continues to act aggressively.
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