The Price Is Right For Coca-Cola Consolidated, Inc. (NASDAQ:COKE)

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Coca-Cola Consolidated, Inc. (NASDAQ:COKE) as a stock to potentially avoid with its 22x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Coca-Cola Consolidated has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the reasonable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Coca-Cola Consolidated

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Coca-Cola Consolidated will help you shine a light on its historical performance.

How Is Coca-Cola Consolidated's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Coca-Cola Consolidated's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.3% last year. Pleasingly, EPS has also lifted 147% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 15% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Coca-Cola Consolidated's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Coca-Cola Consolidated maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Coca-Cola Consolidated is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Coca-Cola Consolidated's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.