For long term investors, improvement in profitability and outperformance against the industry can be important characteristics in a stock. In this article, I will take a look at The Coca-Cola Company’s (NYSE:KO) track record on a high level, to give you some insight into how the company has been performing against its historical trend and its industry peers.
Was KO’s recent earnings decline indicative of a tough track record?KO’s trailing twelve-month earnings (from 29 June 2018) of US$2.16b has declined by -48.15% compared to the previous year. Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of -14.65%, indicating the rate at which KO is growing has slowed down. What could be happening here? Let’s examine what’s occurring with margins and whether the whole industry is feeling the heat.
Although revenue growth over the last couple of years, has been negative, earnings growth has been falling by even more, suggesting that Coca-Cola has been growing its expenses. This hurts margins and earnings, and is not a sustainable practice. Inspecting growth from a sector-level, the US beverage industry has been growing its average earnings by double-digit 15.93% over the prior twelve months, and a less exciting 6.11% over the previous five years. This growth is a median of profitable companies of 24 Beverage companies in US including Diamond Estates Wines & Spirits, Pepsi-Cola Products Philippines and Carlsberg. This means whatever uplift the industry is deriving benefit from, Coca-Cola has not been able to gain as much as its industry peers.In terms of returns from investment, Coca-Cola has fallen short of achieving a 20% return on equity (ROE), recording 11.11% instead. Furthermore, its return on assets (ROA) of 2.56% is below the US Beverage industry of 6.50%, indicating Coca-Cola’s are utilized less efficiently. However, its return on capital (ROC), which also accounts for Coca-Cola’s debt level, has increased over the past 3 years from 17.49% to 18.36%.
What does this mean?
Coca-Cola’s track record can be a valuable insight into its earnings performance, but it certainly doesn’t tell the whole story. Generally companies that face a prolonged period of decline in earnings are going through some sort of reinvestment phase in order to keep up with the latest industry growth and disruption. You should continue to research Coca-Cola to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KO’s future growth? Take a look at our free research report of analyst consensus for KO’s outlook.
- Financial Health: Are KO’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 29 June 2018. This may not be consistent with full year annual report figures.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.