3 Reasons to Sell KO and 1 Stock to Buy Instead

Over the past six months, Coca-Cola has been a great trade. While the S&P 500 was flat, the stock price has climbed by 15.6% to $72.40 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in Coca-Cola, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Coca-Cola Not Exciting?

Despite the momentum, we're swiping left on Coca-Cola for now. Here are three reasons why there are better opportunities than KO and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last three years, Coca-Cola grew its sales at a tepid 5.4% compounded annual growth rate. This was below our standard for the consumer staples sector.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Coca-Cola’s revenue to rise by 4%, close to This projection doesn't excite us and implies its newer products will not accelerate its top-line performance yet.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Coca-Cola’s margin dropped by 23.7 percentage points over the last year. If its declines continue, it could signal increasing investment needs and capital intensity. Coca-Cola’s free cash flow margin for the trailing 12 months was negative 2%.

Final Judgment

Coca-Cola isn’t a terrible business, but it doesn’t pass our bar. With its shares beating the market recently, the stock trades at 24× forward P/E (or $72.40 per share). At this valuation, there’s a lot of good news priced in - you can find better investment opportunities elsewhere. We’d recommend looking at one of our top software and edge computing picks.

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