Is Coca-Cola’s Stock Overvalued Or Undervalued?

Coca-Cola bottles are seen on display at the 2015 American Music Awards Pre Party in Los Angeles, Calif., on Nov. 20, 2015. (Todd Williamson/Getty Images for CSE)

News Analysis

Coca-Cola Co. shares have lagged the S&P 500 in 2021, generating a year-to-date total return of just 4.6 percent.

Coca-Cola has struggled to keep up with the overall market for more than a decade now. At this point, investors may be wondering if there’s any value left in Coca-Cola shares.

Earnings

A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is at about 28.7, nearly double its long-term average of 15.9.

Coca-Cola’s PE is 30, slightly above the S&P 500 average as a whole. Coca-Cola’s PE ratio is also up 17 percent over the past five years, suggesting the stock is priced at the high end of its historical valuation range.

Growth

Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 20.6. Coca-Cola’s forward earnings multiple of 23.1 is also more reasonable, but it’s still slightly higher than the S&P 500 as a whole, making Coca-Cola’s stock look overvalued.

Coca-Cola’s forward PE ratio is also higher than its consumer staples sector peers, which are averaging a 20.3 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren’t everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 0.9; Coca-Cola’s PEG is 3.02, suggesting Coca-Cola is significantly overvalued after accounting for its growth.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.12, well above its long-term average of 1.62. Coca-Cola’s PS ratio is 6.63, more than double the S&P 500 average as a whole.

Finally, Wall Street analysts do see some value in Coca-Cola stock over the next 12 months. The average analyst price target among the 22 analysts covering Coca-Cola is $62.55, suggesting 11.6 percent upside from current levels.

Verdict

At its current price, Coca-Cola stock appears to be slightly overvalued based on a sampling of common fundamental valuation metrics.

By Wayne Duggan

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