Will Recent News Hurt Coca-Cola’s Stock?

With shares of Coca-Cola (NYSE:KO) trading around $40, is KO an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Coca-Cola is a beverage company that engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. Its sparkling beverages include carbonated energy drinks, carbonated waters, and flavored waters. The company’s still beverages comprise nonalcoholic beverages like non-carbonated waters, flavored and enhanced waters, non-carbonated energy drinks, juices and juice drinks, ready-to-drink teas and coffees, and sports drinks. Coca-Cola Co. sells its products under the Coca-Cola, Diet Coke, Coca-Cola Light, Coca-Cola Zero, Sprite, Fanta, Minute Maid, Powerade, Aquarius, Dasani, Glacéau Vitaminwater, Georgia, Simply, Del Valle, Ayataka, and I Lohas brand names.

The Coca-Cola Company defended itself in the Supreme Court this week over its advertising of a popular juice under Coca-Cola’s Minute Maid brand. Despite its name, Minute Maid’s Pomegranate Blueberry juice is actually made almost entirely of apple and grape juice, but Coke maintains that it sufficiently informs consumers of the juice’s ingredients by placing on the label that it is a “flavored blend of 5 juices.” The New York Times reported Monday that Justice Anthony M. Kennedy had some virulent questions for Coke lawyers regarding the labeling and marketing of Coke’s juices this week, and he stated that if “Coca-Cola stands behind this label as being fair to consumers, then I think you have a very difficult case to make. I think it’s relevant for us to ask whether people are cheated in buying this product.”

According to The New York Times, Pom Wonderful, which sells pomegranate juice, is suing Coke for false advertising, because as lawyer Seth P. Waxman explained, “The evidence shows that over a third of consumers who look at this label believe that pomegranate and blueberry juice, in fact, are the majority juices.” This offends Pom because the company maintains that its products actually contain real pomegranate juice — much more than a teaspoon in a half gallon. Minute Maid’s Pomegranate Blueberry label has pomegranate and blueberries placed in front of an apple and grapes. The juice is also dyed dark purple. However, as The New York Times highlights, the beverage contains only 0.3 percent pomegranate juice and 0.2 percent blueberry juice, and that’s where Pom, along with other Supreme Court justices, see a problem. Kathleen M. Sullivan, a lawyer for Coca-Cola, defended the company’s labeling by asserting that, “We don’t think that consumers are quite as unintelligent as Pom must think they are. They know when something is a flavored blend of five juices and the non predominant juices are just a flavor.” However, Justice Kennedy fired back and said, “Don’t make me feel bad, because I thought that this was pomegranate juice.”

T = Technicals on the Stock Chart Are Strong

Coca-Cola stock has made positive progress over the past several years. The stock is currently trading near all time highs and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Coca-Cola is trading above its rising key averages which signal neutral to bullish price action in the near-term.

KO

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Coca-Cola options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Coca-Cola options

13.51%

20%

18%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Flat

Average

June Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Coca-Cola’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Coca-Cola look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-7.69%

-7.32%

8%

-3.28%

Revenue Growth (Y-O-Y)

-4.16%

-3.62%

-2.51%

-2.57%

Earnings Reaction

3.74%

-0.98%

-0.65%

-1.9%

Coca-Cola has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Coca-Cola’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Coca-Cola stock done relative to its peers, Pepsi (NYSE:PEP), Dr Pepper Snapple (NYSE:DPS), Monster Beverage (NASDAQ:MNST), and sector?

Coca-Cola

Pepsi

Dr Pepper Snapple

Monster Beverage

Sector

Year-to-Date Return

-1.67%

2.80%

9.83%

-3.23%

2.93%

Coca-Cola has been an average performer, year-to-date.

Conclusion

Coca-Cola is an iconic company that provides beverage products through its recognized brands to consumers and companies in just about every country worldwide. The company defended itself in the Supreme Court this week over its advertising of a popular juice under Coca-Cola’s Minute Maid brand. The stock has moved higher over the past several years and is currently trading near all time highs. Over the last four quarters, earnings and revenues have been decreasing, which has produced conflicting feelings among investors. Relative to its peers and sector, Coca-Cola has been an average year-to-date performer. WAIT AND SEE what Coca-Cola does this quarter.

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