2 Reasons to Like KO (and 1 Not So Much)

Coca-Cola currently trades at $66.25 per share and has shown little upside over the past six months, posting a small loss of 3.9%. The stock also fell short of the S&P 500’s 16.2% gain during that period.

Given the weaker price action, is now a good time to buy KO? Or should investors expect a bumpy road ahead? Find out in our full research report, it’s free.

Why Does KO Stock Spark Debate?

A pioneer and behemoth in carbonated soft drinks, Coca-Cola (NYSE:KO) is a storied beverage company best known for its flagship soda.

Two Positive Attributes:

1. Elite Gross Margin Powers Best-In-Class Business Model

At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.

Coca-Cola has best-in-class unit economics for a consumer staples company, enabling it to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an elite 61.1% gross margin over the last two years. That means for every $100 in revenue, only $38.95 went towards paying for raw materials, production of goods, transportation, and distribution.

2. Operating Margin Reveals a Well-Run Organization

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Coca-Cola has been a well-oiled machine over the last two years. It demonstrated elite profitability for a consumer staples business, boasting an average operating margin of 25.1%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

One Reason to be Careful:

Long-Term Revenue Growth Disappoints

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Coca-Cola’s 4.6% annualized revenue growth over the last three years was tepid. This wasn’t a great result compared to the rest of the consumer staples sector, but there are still things to like about Coca-Cola.

Final Judgment

Coca-Cola’s positive characteristics outweigh the negatives. With its shares underperforming the market lately, the stock trades at 21.3× forward P/E (or $66.25 per share). Is now a good time to buy? See for yourself in our full research report, it’s free.

Stocks We Like Even More Than Coca-Cola

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