Dow component The Coca-Cola Company (KO) is trading higher by more than 2% in Tuesday's pre-market session after meeting second quarter 2020 earnings per share (EPS) estimates of $0.42. Revenue declined a staggering 28% to $7.2 billion, which missed expectations by a small margin. Global unit case volume declined sharply as well during the quarter, highlighting intense headwinds as a result of the COVID-19 pandemic. The company chose not to provide fiscal year 2020 guidance, due to continued uncertainty.
- Coca-Cola's slumping revenue is dependent on venues that have been closed due to the pandemic.
- The company declined to provide fiscal year guidance.
- Investors have been flocking to PepsiCo while avoiding shares of Coca-Cola.
The beverage giant's income is highly levered to worldwide partnerships with restaurant, entertainment, and sports venues that have been closed or capacity-restricted due to the pandemic. The stock has struggled to recover since the first quarter's 40% downdraft, unlike PepsiCo, Inc. (PEP), which just beat second quarter 2020 estimates by a healthy margin and is trading relatively close to the 2020 high. Coca-Cola's rival has benefited from a hugely popular line of at-home snacks that include Doritos, Quaker Oats, Tropicana, and Lay's Potato Chips.
Coca-Cola Weekly Chart (2013 – 2020)
Coca-Cola finally completed a round trip into the 1998 high at $44.47 in 2014 and eased into a shallow rising channel that crisscrossed the prior high repeatedly into the third quarter of 2018. Committed bulls then took control, generating a channel breakout that posted an all-time high at $60.07 in February 2020. The stock then sold off with world markets, failing the multi-year breakout before settling at a four-year low in the mid-$30s in March.
The first quarter decline broke channel support, while the bounce into June reversed at new resistance now situated in the upper $40s. That level has roughly aligned with the .50 selloff retracement level and the 200-day exponential moving average (EMA), generating a formidable barrier that is unlikely to break after this morning's mixed metrics. Weak buying interest also lowers the odds for a breakout into the low $50s, with the on-balance volume (OBV) accumulation-distribution indicator slumping near first quarter lows.
What is a trading channel? A trading channel is drawn using parallel trendlines to connect a security's support and resistance levels within which it currently trades. A trading channel may also be known as a price channel.
PepsiCo Weekly Chart (2009 – 2020)
PepsiCo stock fell to a six-year low in 2009 and entered an uptrend that broke out to a new high in 2013. Long-term trendlines guided price action through most of the decade, with support roughly aligned at the 50-month EMA. The stock broke out above the upper trendline in 2019, adding to a strong rally impulse that posted an all-time high at $147.30 in February 2020. The selloff into March failed the breakout before finding support at a two-year low just under the lower trendline.
The bounce into April stretched all the way into the .786 Fibonacci selloff retracement level, which marks the highest high in the past four months. The stock has been consolidating at the 50-day EMA and .618 retracement level since that time, carving a potential bull flag continuation pattern. Unlike Coca-Cola, PepsiCo accumulation has soared into the third quarter, with on-balance volume lifting to an all-time high. This bullish positioning predicts that price will soon follow.
What Is Accumulation? Accumulation typically refers to a position size in an asset that increases over multiple transactions. Accumulation can also refer to the overall addition of positions to a portfolio. It can also refer to a general increase in buying activity in an asset.
The Bottom Line
Coca-Cola met conservative second quarter 2020 earnings estimates on Tuesday morning, triggering a buy-the-news reaction, but a sharp decline in quarterly revenues could dampen investor enthusiasm. As a result, rival PepsiCo looks like a better bet for long-term investors, especially with its competitive dividend yield of 3.07% compared to Coke's 3.56%.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.