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Coca-Cola: Will It Continue To Underperform?

Summary

As KO has experienced declining earnings in recent years, it has pronouncedly underperformed the market in the last 5 years.

While the company has a wide moat in its flagship market, it is facing increasing competition in the other markets.

The management has been rewarding itself to the extreme at the expense of the shareholders, regardless of its poor performance.

Coca-Cola (NYSE:KO) has pronouncedly underperformed S&P (NYSEARCA:SPY) in the last 5 years, gaining only 23% (without the dividends) vs. 80% of S&P. This is not surprising, as the stalwart has experienced declining earnings in the last 4 years. Unfortunately, if the management does not improve dramatically its execution and allocation of funds, the stock is likely to continue to underperform unless the market experiences a major correction.

First of all, Coca-Cola is facing a negative secular trend. More specifically, consumers are becoming increasingly health-conscious and hence the soda market is not experiencing growth any more. This is particularly true for millennials, who are not as attached to old brands as the elderly. This does not mean that the sales of Coke will plunge any time soon. On the other hand, they are likely to remain flat or slightly declining for the foreseeable future. And while this is not disastrous, it will not help the stock outperform S&P, which has an average annual historical return around 8%.

Coca-Cola is also facing another headwind, namely the recent tax imposed on sodas in Philadelphia. Despite the extravagant campaign of beverage companies to block the tax, the latter was easily approved, as the extra revenues will fund kindergartens. While the effect of the tax in a single city is negligible for Coca-Cola, it may open the door for approval in several other cities. The trend of taxing wealthy companies in order to assist the low and the middle class has gained great popularity in most countries in the recent years. Moreover, most nations and US states are highly indebted and hence they resort to every possible source for additional income. As citizens are becoming increasingly angry due to the escalating taxes they pay, wealthy companies are great candidates for these additional funds that the nations seek. As the debt loads of most nations keep growing every year, this situation will only become worse for the prospering corporations.

At this point, it is worth mentioning that many shareholders of Coca-Cola hold...


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