Coca-Cola (KO) – Alternative to the Real Thing

by Dan April 11, 2017 2:43 pm • Trade Ideas

Shares of Coca-Cola (KO) are up nearly 3% on the year, underperforming the S&P 500 (SPX) up about 5%, the Consumer Staples etf, XLP (of which it is the third largest component at 8.7%) which is up 6.7% ytd and peer Pepsi (PEP), which is also up 6.7% ytd.

In 2017, KO is expected to have its fourth consecutive eps decline (-2%), and its fifth consecutive sales decline. While the 3.5% annual dividend yield is certainly attractive, the stock’s P/E multiple at nearly 23x expected 2017 eps, and nearly 22x expected 2018 eps is quite fat.  That compares to PEP which trades nearly 22x 2017 expected eps growth of 6%, and 20x expected 2018 eps growth of 8%, with a 2.7% annual dividend yield.

Despite the fact that KO is up 7% from its 52-week lows made in December, and apparently trying to put in a little double bottom near term, the chart looks fairly vulnerable on a long term basis. Sure the stock might attempt to fill in the late July earnings gap towards $44, but a failure here might put the $41/40 level in play:

KO 1yr chart from Bloomberg

Taking a slightly longer term view, a failure back to $40 would place the stock below the long-term uptrend that has been in place since the 2009 lows, offering little technical support below till the Aug 2015 flash-crash low near $36:

KO 10yr chart from Bloomberg

The next identifiable catalyst for KO will be Q1 earnings on April 25th prior to the open. The options market is implying about a 3.5% move in either direction between now and the close on Friday, April 26th. The stock on average has moved about 2.5% the day of results over the last four quarters, while the 10-year average one-day post-earnings move is only about 2%.

Short-dated options prices (implied volatility, blue below) is ticking up, but at 13.5%, is still fairly low relative to prior periods over the last year immediately before earnings. This is obviously the result of low levels of realized volatility (how much the underlying is moving) in the broad market, and more specifically, KO’s 30 day at the money realized volatility (white below) is 6.6%. 10-year lows!


While options prices look cheap on a historical basis, they may prove to be very expensive relative to the stock’s movement, especially if the stock does not move much from its recent consolidation immediately following results.

For those of you who have a convicted directional view into and out of KO’s Q1 earnings, at the money options are very dollar cheap. For instance with the stock at $42.68, the April 28th 42.50 strike calls are 67 cents (18 cents in the money) break-even at $43.17 on the upside, only risking 1.5% of the stock price. On the flipside, if you are looking for protection for a long, or a near dated bearish bet, with the stock at $42.68, the April 28th 42.50 puts are offered at 46 cents, and break-even at $42.04, risking about 1% with a wider break-even than the calls given they are slightly out of the money relative to the calls.