(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Coca-Cola Co. (KO) shares have soared by nearly 12% since the middle of May, easily surpassing the rise in the S&P 500 of just 4%. But the ride over the past year has not been nearly as smooth, with the stock only rising by about 3%. Some options traders are betting that the recent rally will soon fizzle, and they expect shares of the beverage company to plunge by about 14% by the middle of January.
On Wednesday, the company reported solid quarterly results beating revenue on both the top and bottom lines. Despite the better results, analysts have lowered their estimates for the third quarter while forecasting a sharp decline in revenue.
Betting on a Big Drop
Some traders were less than impressed with Coke's results and are betting shares of the stock fall by options expiration on Jan. 18. Open interest levels at the $40 strike price puts nearly doubled to 34,000 open contracts, after the company's results. The stock would need to fall to roughly $39.75 for the buyer of the puts to break even if holding the options until expiration, a drop of about 14% from the stock’s current price around $46.50.
KO EPS Estimates for Current Quarter data by YCharts
Analysts are forecasting substantial earnings growth in the coming third quarter, looking for a growth rate of more than 10%. However, revenue is expected to decline by over 9% versus last year. Additionally, analysts have trimmed their estimates for earnings by nearly 2 percentage points while also reducing revenue forecast by about 60 bps. The outlook for the year is almost identical to the quarter, with earnings expected to grow by nearly 9%, while revenue is seen falling by over 10%.
KO P/E Ratio (Forward 1y) data by YCharts
Shares of Coke do not come cheap, trading at nearly 21 times 2019 earnings estimates, higher than the S&P 500 2019 earnings multiple of about 17.3. It makes shares of Coke not only expensive when adjusted for earnings growth but against the market as well.
Coke also noted that it is facing currency, acquisition and divestiture headwinds in the third quarter.
Coke's better-than-expected results in the second quarter are giving the stock a boost in the short term. But for shares to continue to rise, the company will need to keep putting up strong results to have investors continue to pay the hefty premium for the stock. At this point, at least some traders are still betting on good times ahead.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.