For Investors, Things Will Go Better Without Coke

As unsettling as the prospect may seem, it's time to sell iconic beverage giant Coca-Cola, which has suffered from changing consumer tastes.
By John Persinos ,

The following assertion seems downright un-American, but Coca-Cola (KO) - Get Report is a stock you should shun or sell. Sure, it's one of the world's most recognizable brands, and the Coke logo is iconic, but a secular shift in consumer consumption habits has hurt this erstwhile "buy and hold" blue chip.

Coca-Cola is scheduled to release operating results before the market opens on July 27, and the expectation is for tepid growth year over year. Shares of the company were down slightly in early afternoon Thursday trading. 

Below we examine the headwinds this storied company is facing. Below, we also unveil an investment strategy that makes money regardless of economic or consumer trends.

The average analyst consensus is that earnings per share (EPS) will come in at 58 cents, compared to 63 cents in the same quarter a year ago. Shares currently trade at about $46; the consensus one-year target price is $48, for a gain of about 4%. In addition to its meager projected yearly gain, the stock faces even worse longer-term prospects.

Sugary soda beverages are increasingly unpopular, held up by government officials and health experts as a major culprit for the epidemic of obesity in America. Even schools are getting into the act, by trying to dissuade kids from guzzling jumbo-sized sodas in the cafeteria and playground. These trends aren't new, either.

U.S. per-capita consumption of carbonated soft drinks has fallen to its lowest level since 1986. Over the past 20 years, sales of full-calorie soda in the U.S. have plunged by more than 25%. Last year marked the 11th consecutive year for declining soda sales and the rate at which consumers are abandoning carbonated soft drinks is accelerating. Last year, sales fell by 1.2%, compared to 0.9% in 2014.

For the major beverage companies like Coca-Cola, PepsiCo and Dr Pepper Snapple Group, offering diet alternatives is no solution. Sales of market leader Diet Coke fell by about 5.6% in 2015.

"Big Soda" has been frantically revamping its products, eliminating sweeteners such as high fructose corn syrup and marketing smaller-sized containers. They're also offering new fruit juice concoctions, all to little effect.

Compounding Coca-Cola's woes is also a shift to bottled water. The worldwide sales of bottled water products are expected to grow at a compounded annual growth rate of 8.4% from now until 2022, according to the trade journal Brisk Insights.

Coke and Pepsi now offer their own bottled water brands, but therein lies another dilemma: When it comes to bottled water, consumers are showing scant brand loyalty. Consumer preferences are established early in life, which could be a death knell for Coca-Cola, because kids aren't getting "hooked," so to speak, on Coke during their formative years.

The situation is analogous to declining rates of smoking, which raises another parallel: Growing numbers of states and localities are passing "sugar taxes" on carbonated soft drinks like Coca-Cola, giving these once benign-seeming beverages a lasting stigma.

As carbonated soft drinks become the "New Tobacco," you're better off avoiding Big Soda, which finds itself on the wrong side of demographic and cultural trends. The Coca-Cola brand name has seen better days. Avoid the stock.

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John Persinos is an editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.

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