Coca-Cola (NYSE:KO) is one of the most recognizable consumer brands in the world as it holds a 50% global market share in the packaged beverage market. The company has long been a market darling due to it’s steady growth, economically stable business and high dividend yield.
The company is one of market maven Warren Buffett’s major and favorite holdings through his company Berkshire Hathaway, that has been a shareholder for more than 30 years now. Last week the company released it’s Q1 2020 numbers, revenues were down 1% and an EPS of $0.64 per share, beating consensus estimates by a steep 65% . However, the company’s growth story is now facing a roadblock as the coronavirus pandemic poses a threat to all it’s business avenues.
Coca Cola generated 50% of it’s revenues in the last quarter from businesses such as restaurants, fast food chains, movie theatres, malls, travel eatables and so on, all of which have shuttered due to the coronavirus outbreak.
As the company resumed operations in China, the situation shed light on what things might look like when the lockdowns are lifted. The company reported slow sequential revenue growth in China as people remain skeptical to step out and expectations of a second wave of corona cases in the fall. Even people do step out, capacities at restaurants and other entertainment businesses may be low due to social distancing norms.(Seeking Alpha)
A recently released survey by the James Beard Association stated that most independent eateries in the US have laid off 91% of hourly employees and 70% of permanent employees and are 80% are unsure of reopening as future demand looks bleak(USA Today). It should be noted that the company generates 32% of it’s revenue from the US and 18% from the Europe region, both of which are in lockdown and face potential economic recessions.(Forbes)
As the pandemic has spurred an economic slowdown, people end up with lower disposable incomes. Analyst expectations for the company’s global revenue are expected to be 25% lower its 2019 tally of $37.3 billion. Experts expect that this reduction in revenue will not be accompanied by a proportionate decrease in expenses due to high fixed costs and upkeep expenses, reducing margins by 20% from 24% to 19%.
The pandemic is also posing another potentially huge problem for the aerated beverage industry. As demands for gasoline is down sharply due to people being home, specifically 30% in the US, Ethanol production has also seen a steep fall, leading to a CO2 shortage, a major ingredient for the company. In the US, 75% of all ethanol production plants have shut down or cut production, which has led to major supply issues and prices to shoot up by as much as 25%. This could pose a substantial threat to production and margins.
Despite the stock being down 15% YTD, investors should wait to see the effect of the pandemic on the stock in the second quarter, as bulk of the effect of the shutdown was only seen in March. KO stock is trading at $45.93 on Thursday at Apr 30, 12:23 EDT