Here’s Why Coca-Cola Stock Is Falling Despite Beating Earnings Expectations

Key points

• Coca-Cola had strong third-quarter earnings that beat estimates.

• The share price was down 2% on Wednesday.

• Is Coca-Cola stock a good buy?

The sell-off could be related to external factors.

Coca-cola (NYSE:KO) fell about 2% on Wednesday after the beverage maker posted strong third-quarter earnings that beat estimates.

The company saw revenue decline 1% year over year to $11.85 billion, better than the $11.61 billion analysts had forecast. But organic revenue increased an impressive 9%.

Net income fell 8% to $2.8 billion, or 66 cents per share. Adjusted earnings were 77 cents per share, also beating estimates.

The numbers weren’t spectacular, but the stock was down 2%. A negative catalyst could have been news of a 10-state e-coli outbreak linked to McDonald’s (NYSE:MCD) and its Quarter Pounder burgers.

Coca-Cola CEO addresses e-coli outbreak

Third-quarter revenue figures were further affected by a 2% drop in sales of concentrate, which is basically the syrup it sells to bottlers for its carbonated beverages. However, it saw a 9% year-over-year increase in what it calls price and mix, which is basically the price per unit sold.

Additionally, Coca-Cola saw organic revenue growth of 9% in the quarter, which is Coca-Cola’s preferred metric as it excludes the impact of foreign exchange.

However, the operating margin fell to 21.2%, from 27.4% in the same quarter of the previous year. The drop was partly due to a $919 million charge for liability revaluation related to the Fairlife acquisition in 2020. A 13-point headwind due to foreign currency fluctuations also impacted earnings.

“Our business continues to demonstrate resilience in the face of a dynamic external environment,” said James Quincey, president and CEO of Coca-Cola. “We are encouraged by our performance so far this year and our system’s ability to manage near-term challenges while also staying focused on long-term growth opportunities.”

Quincey also addressed the impact, if any, of McDonald’s e-coli situation, in response to an analyst question on the third quarter call. McDonald’s is one of Coca-Cola’s largest customers.

“Obviously, our hearts go out to the people who have been affected by the contamination,” Quincey said. “Certainly, we are a great partner of McDonald’s. They are a great partner of ours. We will help them in any way we can while they work on whatever is going on. Clearly, information is very scarce as far as those of us who are concerned are concerned. “We are further removed from the situation. Certainly, when you look at what is in the media so far in terms of the states that have been affected, I would say that, at this stage, it is not going to have a big significant impact on the business.”

Is Coca-Cola stock a good buy?

The selloff, if it was related to the McDonald’s news, is probably a knee-jerk reaction from investors that shouldn’t have a big impact on Coca-Cola.

Otherwise, although the quarter had mediocre results, the outlook is quite decent for Coca-Cola.

For fiscal 2024, the company updated its outlook, projecting organic revenue growth of 10%, which is at the high end of its long-term growth model. Additionally, it anticipates currency-neutral EPS growth of 14% to 15%. Additionally, the company expects to generate free cash flow of approximately $9.2 billion for the fiscal year.

One of the best features of Coca-Cola stock over the years has been its ability to generate cash flow and grow its annual dividend. It is one of the best dividend stocks on the market, having increased it for 61 consecutive years.

Coca-Cola currently offers a quarterly dividend of 49 cents per share with a robust yield of 2.79%, with a payout ratio of 67%.

Coca-Cola stock also tends to do well in down markets, like a consumer staple. It has only had one negative year since 2010, and that was in 2023 when the market was booming.

It’s not that cheap right now with a P/E of 28, but Coca-Cola has always been a reliable stock, good for downside protection in a portfolio, with a great dividend. It would be a buy if you are looking for a stock with those qualities.