Coca-Cola Co. (KO) has underperformed in 2013, with just 4% returns vs. almost 19% gains for the S&P 500 since January. Furthermore, since KO’s May peak when it set a new all-time high of $43.43, the stock is down about 13%.
Coca-Cola is a stock in trouble, and investors can expect Coke earnings to continue to further pressure this blue chip over the next few months.
So sell KO stock before earnings this week, because there’s not going to be a lot of fizz in this fading soda giant.
KO Earnings Preview
Coca-Cola just posted earnings and revenue misses in mid-July, including the first sales volume decline in North American operations in 13 quarters. It makes sense — after all, a focus on fighting diabetes and obesity in America and in Mexico means sugary soft drinks aren’t as in demand.
This isn’t just a Coke problem, of course, with competitors PepsiCo (PEP) and Dr Pepper Snapple (DPS) in the same boat as sugar-laden soft drinks are on the decline. Pepsi reported U.S. sales volume dropped 3.5% in its previous earnings report, and the volume drop across all North America was in the mid-single digits.
Coca-Cola earnings excuses include blaming the wet, cool weather as a deterrent to soft-drink sales, but let’s get real here. This is a shift in consumer behavior that shouldn’t be overlooked by investors.
That’s especially true for KO stock and Coke earnings. PepsiCo owns brands including Lipton Teas, Cheetos snacks and Quaker granola, and DPS at least has some healthier soda alternatives via fruit juices including Snapple and Nantucket Nectars.
Coca-Cola did position itself a bit beyond soda with the 2001 buyout of Odwalla juices and growth in its Dasani bottled water unit over the last several years. But it’s clear that Coca-Cola is the big dog … and that dog is on the wane.
The KO earnings report showed a miss on revenue last quarter, and the stock fell 3% in July after its report. A similar showing may be in the works again. Coke stock has been stuck in a downward drift, two analysts have revised down their earnings outlook for KO stock in the last 30 days and the secular shift in consumer behavior isn’t likely to change anytime soon.
The final nail in the coffin is that — as the case is with all multinationals — a strong dollar and unfavorable exchange rates will create a headwind on earnings overseas. The dollar remained very firm in Q3 with talk of the Federal Reserve tapering asset policies … so that will add just one more headwind to KO earnings this week.
Sell Coke Stock
I wouldn’t hang on to Coca-Cola stock in advance of this week’s earnings. While the soft drink giant has a long history of paying good dividends and delivering shareholder value, it might be time to consider looking elsewhere for a low-risk consumer play. After all, Coca-Cola dividends are cold comfort as the broader stock market has delivered four times the gains in 2013.
And they won’t be much of a comfort in 2014 if the stock goes nowhere next year, either.
Coke remains one of the biggest brands in the world, yes, but even that status is slipping after Apple (AAPL) bounced it from the No. 1 rank. And yes, with Warren Buffett and Berkshire Hathaway (BRK.B) as the largest shareholders in Coke stock, it’s safe to say this is one of the most stable investments on Wall Street.
But don’t think Coke is a sure thing just because of its stable history. Losses since this spring amid a major rally prove the downside risks — and Coca-Cola earnings might accelerate those losses in the next few days.
Related Reading on Coca-Cola Earnings
- Pepsi and Coke struggle amid “peak soda” pressures. (The Slant)
- KO blames the weather in July for its revenue miss. (WSJ)
- On the other hand, James Brumley still likes Coke stock as a low-risk staples play. (InvestorPlace)
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.