Stock of the Week
NYSE Symbol: KO
Price as of 3/22: $38.30
After making new all-time highs one month ago, the major averages have fallen over 30% as the governments around the globe are restricting travel and shutting down businesses to slow the spread of the coronavirus. The Federal Reserve Bank of St. Louis President James Bullard predicts the U.S. unemployment rate may hit 30% in the second quarter due to shutdowns to combat the coronavirus, with an unprecedented 50% drop in gross domestic product. Many of the hardest hit sector like travel and leisure will take a while to come back, but more defensive stocks look more attractive with the recent sell off. This week we will highlight beverage company, Coca Cola.
Coke recently said they have put preparedness plans in place at their facilities to ensure continued operations, while also taking all necessary steps to keep their teams healthy and safe. They are working closely with our bottling partners, but do not foresee any near-term disruptions in concentrate or beverage base production. However, directions from the government to refrain from dining at restaurants, the cancellation of major sporting and entertainment events, the material reduction in travel, the promotion of social distancing and the adoption of work-from-home policies will hurt demand for Coke's products. Coca Cola has since withdrawn full year guidance.
With a 35% decline in the last month, Coke's stock is now trading at a four year low with a dividend yield of 4.2%. The stock currently trades for 15 times earnings, but those earnings estimates are likely to come down. Coke has historically traded with a high PE due to their consistent earnings and cash flow. Morgan Stanley downgraded the stock last week with a new price target of $52 a share which looks attractive with the stock trading 25% below those levels. Coke does have $44 billion in debt, but Moody's recently issued a report that their debt is stable. With $11 billion in cash and $6 billion in free cash flow in normal years, Coke can weather this storm and reward shareholders going forward.