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Has Cristiano Ronaldo damaged investors’ enthusiasm for Coca-Cola stock?

The old saying ‘any publicity is good publicity’ may not be true in Coca-Cola’s (NYSE: KO) case. The global beverages company was recently in the headlines because of footballer Cristiano Ronaldo’s apparent snub of its products at a press conference. The move coincided with a $4bn reduction in the company’s market valuation.

However, this equated to a mere 1.6% fall in the company’s share price. Moreover, its overall trajectory has remained upward during recent months. The prospect of an end to lockdown measures in its key markets seems to be driving improving investor sentiment, since the business has experienced a challenging period during Covid-19.

Indeed, reduced demand due to closures across leisure settings, such as pubs and restaurants, contributed to an 11% fall in Coca-Cola’s sales in 2020. Earnings per share declined by 14%, as the firm struggled to fully offset lost revenue with at-home sales.

A changing structure for Coca-Cola

Encouragingly, the company is using Covid-19 as an opportunity to accelerate changes to improve its long-term financial prospects. Notably, it is halving its range of brands from 400 to 200 products. This will enable it to focus on brands that resonate more strongly with consumers, such as lower-sugar alternatives and plant-based beverages, and offer greater long-term growth and scalability potential.

A smaller number of brands may also lead to a nimbler business that can put greater marketing weight behind its products in what remains a fast-changing global economic environment. This process may be further enhanced by a new company structure that could allow popular regional brands to quickly become global sellers.

Greater innovation

In addition, Coca-Cola is focusing to a greater extent on innovation. It is increasingly using artificial intelligence and digital resources to identify emerging consumer trends. It has recorded e-commerce market share gains across key advanced markets such as the US, Japan and UK. This could position it for growth as digital sales continue to become an increasingly large part of the wider consumer goods market.

Meanwhile, the company has accelerated its sustainability agenda. It is reducing plastic waste and water usage in response to evolving consumer trends. It is also responding to changing consumer tastes, with 140 product reformulations in 2020 cutting 125,000 tons of added sugar on an annualised basis. This could allow its products to remain relevant as consumer attitudes towards health continue to evolve.

Potential threats

Of course, Covid-19 remains a known unknown. Ongoing lockdown measures are likely to act as a drag on Coca-Cola’s financial performance in the coming months. The uneven economic recovery from the pandemic across the world’s regions may also cause persistent challenges in some of the company’s key markets.

Even a global economic recovery presents a potential threat for the business. Commodity prices have already started to rise, with the company reporting higher costs for inputs such as packaging materials and high-fructose corn syrup in its latest quarterly update. Although Coca-Cola is largely hedged against rising input costs in the short run, they could nevertheless harm its long-term financial prospects.

Coca-Cola share price prospects

Coca-Cola is forecast to post a rise in earnings per share of 22% in the current financial year. Its latest quarterly update suggests it has made strong progress as lockdown measures have begun to ease, which bodes well for its future recovery prospects.

The stock trades on a price-earnings ratio of 30. This suggests it could offer fair value for money relative to the wider stock market, given its growth potential as the world economy reopens following Covid-19.

Certainly, its short-term prospects remain highly dependent on the easing of lockdown measures. But its restructuring, innovation and sustainability focus could allow it to deliver relatively attractive long-term returns.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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