Coca-Cola Faces Deteriorating Environment, But BofA Says Fundamentals Remain Solid

Coca-Cola Co KO reported first-quarter results Tuesday that reflect a strong start to the quarter and a subsequent decline in demand, according to BofA Securities.

The Coca-Cola Analyst

Bryan D. Spillane maintained a Buy rating on Coca Cola with an unchanged $53 price target.

The Coca-Cola Thesis

The coronavirus pandemic negatively impacted consumption towards the end of the first quarter, Spillane said in a Tuesday note. (See his track record here.)

Despite this, Coca-Cola reported revenue of $8.573 billion, operating income of $2.634 billion and gross margins of 61.6%, all beating BofA’s expectations. The company’s concentrate sales were higher than unit cases, with bottlers building inventory, the analyst said.

Coca Cola’s statement indicated a deteriorating business environment in March and April, Spillane said, adding that since the beginning of this month, the company’s volumes have declined globally by around 25%.

Coca-Cola sees these pressures as temporary and expects to record sequential improvement in the back half of the year, the analyst said.

“While the near term results will be challenged by the decline in away from channels, the underlying fundamentals at KO were solid heading into the current situation and we expect it to improve as the pressure subsides.”

The stock has a justifiable premium valuation, as Coca-Cola expects grow organic sales and earnings in 2021, according to BofA.