Coca-Cola Consolidated: Popping Growth Like An Ice-Cold Coke

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Strong pricing power and brand reputation continue to drive revenue growth despite volume declines.Healthy balance sheet, with net debt declining over the past years and strong liquidity ratios, ...

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(NASDAQ:COKE) has been gaining traction among momentum investors over the last few years, as the stock has been overperforming the S&P 500 by 250% in the last five years. Many analysts have been downgrading this stock due to high valuation ratios and signs of overbuying activity. However, I still believe that the strong fundamentals of the company back up continued growth in the share price. Indeed, there are some factors that could break my bull thesis apart, which I discuss in detail in the risk section below. For now, I'd like to start with a brief company overview section for those readers new to this stock. Company Overview Next time you crack open a Coke at an NFL game, it's likely Coca-Cola Consolidated made it possible, especially if you live on the East Coast. You might be surprised to know that in the US, Coca-Cola products are bottled by several independent bottlers that operate across different regions:  Coca-Cola UNITED: operating primarily in the southern US, including Alabama, Florida, Georgia, Louisiana, Mississippi, and parts of Tennessee. Coca-Cola Southwest Beverages: this is a subsidiary of Arca Continental, operating in Texas and parts of the southwestern US. And finally, Coca-Cola Consolidated, the largest Coca-Cola bottler in the US, serving over 60 million consumers across 14 states on the East Coast.  I considered including below a map showing the states where Coke Consolidated operates and distributes its products. coke consolidated The company has two operating segments:  Nonalcoholic beverages: this segment includes the distribution of Coca-Cola products (including Coca-Cola, Sprite, and Fanta), Dr. Pepper, Powerade, and Monster Energy products, among other smaller brands. All other: this segment includes services like equipment maintenance and delivery.  I considered including below a breakdown of the revenue in Q2 and H1 per product category from the latest 10-Q.   Product Category Q2 2024 Revenue ($ million) % Change from Q2 2023 H1 2024 Revenue ($ million) % Change from H1 2023   Sparkling Beverages 1,048.9 +4.4% 1,996.4 +4.0%   Still Beverages 597.5 +4.2% 1,108.4 +2.4%   Sales to Other Bottlers 92.4 -0.9% 171.1 -4.8%   Post-mix and Other 57.2 -15.3% 111.7 -13.6%   Click to enlarge Ownership-wise, insiders own 19% of the common stock, which is a decent amount of skin in the game. seeking alpha Headwinds, Risks, and Challenges Let's start with all the factors that could break my bull thesis apart. Despite a 3.3% increase in net sales during Q2 2024, the physical case volume dropped by 1.2% YoY. If we look at the first half of the year, volume was down by 0.8% YoY. To be transparent, I wouldn't sweat as much about this minor decline in volumes if revenue hadn't increased so much. It appears that the pricing actions taken earlier in the year have proven to be very effective at increasing net sales, mainly by leveraging its brand equity. However, if customers become more price sensitive due to macroeconomic factors, external to the company, I believe there is a moderate risk of net sales to decline. Among those factors, there could be an increase in unemployment in the US over the next 12 months. As a side note, the September US jobs report showed that there were 6.8 million unemployed individuals, with little change compared to the previous month, but an increase from 6.3 million a year earlier. In my view, relying too heavily on price increases (which makes sense considering the brand's moat) without corresponding growth in volume or market share could have negative effects in the case of an economic downturn. Just to be clear, I am not betting that there will be a downturn in the economy, but if there is, the downside could be significant. As a matter of fact, the still beverage category experienced a 3.5% decline in volumes, showing that brands like Dasani Water and Bodyarmor are struggling with sales. I am particularly concerned about the latter, Bodyarmor, which underperformed despite strong marketing efforts, reflecting possible consumer shifts away from certain sports drink categories. Moving on to the legal landscape, the company is not involved in any major dispute that could lead to significant downside. The main cases and lawsuits I was able to find (here and here) are labor-related, which (unfortunately) is normal for a company of this size (16,900 employees as of June 28, 2024). Outlook I'd like to start with price action. Compared to the consumer defensive sector, the beverages industry, and the S&P 500 over the last five years, the company's performance has been nothing less than remarkable. Stock Rover If we look at the daily chart below, the bull run is clearly visible, with shares increasing by 110% in the past 12 months. trading view However, in recent weeks, it looks like there has been a gentle pullback, with the RSI cooling off. So, is this a good time to buy? In my view, I believe the answer is yes. Let me explain to you why. A closer look at the income statement shows revenue and gross profit increasing consistently YoY since Q4 2021. seeking alpha Operating income and net income have been increasing significantly as well, with double-digit growth (year-over-year) in the last quarter. The balance sheet shows a healthy picture of the company, with total current assets higher than total debt. trading view Additionally, net debt has been decreasing significantly over the last few years, leading to healthy liquidity ratios. seeking alpha I considered including below a table showing the liquidity ratios of the company. I am particularly impressed by the cash ratio of 1.1.   Ratio Value   Cash Ratio 1.10   Current Ratio 1.97   Quick Ratio 1.73   Click to enlarge With regard to the debt structure of the company, I included below a summary from the latest 10-Q.   Type of Debt Amount (in millions) Interest Rate Maturity Date   2025 Senior Bonds $350 3.800% November 25, 2025   Senior Notes $100 3.930% October 10, 2026   2029 Senior Bonds $700 5.250% June 1, 2029   2030 Senior Notes $150 3.960% March 21, 2030   2034 Senior Bonds $500 5.450% June 1, 2034   Revolving Credit Facility $500 (max capacity) Variable June 10, 2029   Click to enlarge Considering that the company has $1.7 billion in cash, I am not concerned with its ability to pay down this debt. The cash flow statement looks quite decent, with positive free cash flows since Q4 2022, despite a double-digit decline in Q4 2023 and Q1 2024. trading view With regard to buybacks, the company repurchased during the second quarter $13.3 million worth of shares. Additionally, the company bought $553.7 million of its own stock from CCCBI, a subsidiary of The Coca-Cola Company. Although this was a big purchase, I highly favor this decision to reduce the number of shares owned by outside entities. Moving on to dividends, the company has increased its regular dividend payout by 400% in the last quarter. Additionally, they paid a huge dividend of $16 per share in January this year. So far, the fundamentals look great. Let's move on to insider transactions. A quick look at the latest activity shows the sale operation by the Coca-Cola Company, already mentioned above. There is a lack of insider buying activity, which leaves me disappointed, as I heavily weigh this factor into my investment style. There wasn't any meaningful activist investor buying activity either. However, institutional investors have shown interest in the company during the second quarter, with a 96% increase in new positions. This led to a 7% increase in shares owned by institutional investors. It appears that the grownups are not sweating about the sheer increase in the share price. As I said before, the fundamentals make sense. Valuation-wise, I believe this is the main reason why analysts have been downgrading this stock to a Hold. The football field below shows that the company is trading close to the maximum range of the valuation ratios displayed. Stock Rover Despite the dire picture above, I am not sweating about these high valuation ratios as the fundamentals back up the bull run, and the momentum hasn't stopped yet. Finally, and to put things into perspective, I decided to include a brief peer comparison below. Stock Rover The table above is sorted in descending order by EV/EBITDA. COKE is in the lower half of the table, which shows that the company is not overvalued when compared to its peers. Conclusion To wrap up, I believe a Buy position in this stock makes sense. Indeed, there are some risks to consider. The drop in physical case volumes, especially for the still beverages category, could be a sign of concern. If consumers start pushing back on higher prices due to broader economic issues, the company could see its net sales declining for the first time in several years. Additionally, the lack of insider buying activity and high valuation ratios are other risk factors to consider. However, I believe that the positives outweigh the negatives. Revenue and operating profits are growing steadily, mainly due to their strong pricing power and brand reputation. The balance sheet looks healthy, with plenty of cash to cover their debts. Recent buybacks and dividend hikes are good news for shareholders, and institutional investors are showing increased interest in the stock.  Despite the high valuation ratios, I believe the company's strong performance and momentum are solid reasons to be optimistic. Therefore, I maintain a Buy rating for this stock.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2475665774"}