Coca-Cola
stock is edging lower on Wednesday, a day after the beverage maker’s beat-and-raise third-quarter earnings. The report was a welcome win at a time when few investors are interest in owing consumer-staples stocks, but one that might not help the broader industry.
Coke (ticker: KO) earned 74 cents a share in the quarter on revenue of $11.95 billion, easily ahead of the earnings of 69 cents per share and revenue of $11.4 billion that analysts were predicting. For the full year, the company now expects organic sales to grow 10% to 11%, up from prior guidance of 8% to 9%. It also sees exchange rates hitting its bottom line harder than expected, but its forecast still implies earnings-per-share growth of 7% to 8% for the full year, up from 5% to 6% previously.
The company’s ability to boost its outlook even as currency headwinds intensify show that the report “was more than just another quarter,” according to Wells Fargo analyst Chris Carey. “Why? Simple: Coke again was given the opportunity to confront a growing foreign-exchange storm (typically ‘wash out’ to USD earnings per share)…and the ‘all weather’ model came through.”
He raised his price target by $2 to $62 following the results while keeping an Overweight rating on the stock, writing that Coke’s “resilience seems underappreciated,” and the fact that it can deliver on earnings-per-share growth this year in the face of a strong dollar “gives confidence on the ability to do it again next year.”
Likewise at a time when plenty of staples companies—which have raised prices following inflation—are seeing volumes decline as belt-tightening consumers pull back on purchases, Coke seems to be bucking that trend. “Coke [is] one of the few models in Staples currently that can reasonably make the case for volume growth next year,” Carey writes.
That’s a key consideration, given that lower volumes are one of the key trends that bears have latched onto: At a time when high interest rates and valuations, along with worries about weight-loss drugs, have left few investors willing to buy into the group, some industry watchers believe it will be hard for packaged-food and beverage stocks to turn around until companies can show that consumers are still willing to buy their products in the face of higher prices.
The
Consumer Staples Select Sector SPDR
exchange-traded fund (XLP) is off 8.8% year to date.
Coke’s quarter was good enough to earn kudos even from analysts on the sidelines. Goldman Sachs’ Bonnie Herzog reiterated a Neutral rating on the shares but writes that she “remain[s] impressed by Coke’s top-line momentum and execution in a very challenging environment, as it further positions itself well for healthy, sustainable, long-term growth.”
She notes that Coke’s quarter could bode well for
Keurig Dr Pepper
(KDP), among others, given Coke’s U.S. beverage business, although Keurig may still face challenges around its coffee segment.
Ultimately, the main takeaway may be that Coke’s success is its own, rather than a harbinger of positive change for peers, if its volume growth and outlook remain an outlier in the industry. And it remains to be seen if even that is good enough for the market, given that
PepsiCo
(PEP) has since given up its post-earnings gains, despite a relatively upbeat outlook. Carey, a bull, has a price target just $2 above Herzog’s $60, despite her being sidelined.
In the end, staples stocks overall may remain as hard a sell as $9 cereal.
Write to Teresa Rivas at [email protected]
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