Dow component The Coca-Cola Company (KO) reports fourth quarter 2020 earnings on Wednesday, with analysts looking for a profit of $0.42 per share on $8.62 billion in revenue. If met, earnings per share (EPS) will mark a slight profit reduction compared to the same quarter last year. The beverage king rallied 1.4% in October after beating third quarter expectations on a 6% revenue decline but is now trading below the close of that session.

Key Takeaways

  • Coca-Cola reports fourth quarter earnings on Wednesday morning.
  • The company has lost significant income from sports, entertainment, and fast food venues under pressure due to the pandemic.
  • Greater product diversity helped rival PepsiCo, Inc. (PEP) outperform Coca-Cola in 2020.

The pandemic has affected Coca-Cola in multiple ways. For starters, the company has lost major income from lucrative franchising deals with sports stadiums, movie theaters, and fast food chains that are struggling due to social distancing mandates. COVID-focused customers are also walking past soda machines empty handed, worried that the last buyer or bottling representative left some virus behind on the container, order button, or in the change bowl.

Rival PepsiCo struggled in 2020 as well but outperformed Coca-Cola by a wide margin due to its more diverse product line. Snack foods have done exceptionally well during the pandemic for obvious reasons, offsetting a beverage line that is also dependent on big franchises and unattended dispensers. Admittedly, Coca-Cola is making up a little lost ground with its 3.30% forward dividend yield, higher than Pepsi's still respectable 2.90%.

Wall Street consensus on Coca-Cola has deteriorated in recent months, dropping to an "Overweight" rating based upon 11 "Buy," 5 "Overweight," 8 "Hold," and no "Sell" recommendations. Price targets currently range from a low of $50 to a Street-high $67, while the stock is set to open Monday's session right at the low target. The current distaste for defensive and yield plays looks like the culprit for this depressed placement.

Tip

The dividend yield, expressed as a percentage, is a financial ratio (dividend/price) that shows how much a company pays out in dividends each year relative to its stock price.

Coca-Cola Monthly Chart (1998 – 2021)

Chart showing the share price performance of The Coca-Cola Company (KO)

TradingView.com

Coca-Cola stock topped out in the mid-$40s in 1998 after a multi-year uptrend and sold off to a seven-year low at the 200-month exponential moving average (EMA) in 2002. It tested that support level successfully during the 2008 economic collapse and turned higher into the new decade, completing a round trip into the prior high in 2013. Buying interest then evaporated, yielding a comatose uptick that added just five points into the first quarter of 2018.

Price action finally cleared multi-decade resistance in 2019, generating a slow but steady advance that posted an all-time high at $60.13 in February 2020. The stock relinquished eight years of upside into March, ahead of a recovery wave that reversed at the .786 Fibonacci selloff retracement level in December. Price action has now settled back on 50-month EMA support, which is just four points above the 1998 high.

The monthly stochastic oscillator has crossed into a sell cycle before reaching the overbought zone, highlighting relative weakness that could weigh on Coca-Cola's performance well into the second quarter. However, low Wall Street targets should keep a floor under price, so there isn't much risk in "buying on weakness" as long as you're willing to walk away and not look at the stock for a year or two.

Tip

Buying on weakness is a proactive trading strategy where a trader enters into long positions ahead of the anticipated reversal in a security's price. Traders will generally either go long a security, or buy call options, in a preemptive move to capture the entire expected upside. A buy weakness strategy is the opposite of a selling into strength strategy.

The Bottom Line

Coca-Cola reports fourth quarter 2020 earnings this week, with low expectations making perfect sense given continuing headwinds.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.