This Warren Buffett favorite is breaking records

Coca Cola (NYSE:KO) was a mainstay of Warren Buffett Berkshire Hathaway holding company for a long time. The iconic beverage brand hits records as it recovers from the coronavirus pandemic a more robust business.

Coca-Cola sales declined in 2020 as restaurants, sports stadiums and movie theaters were forced to close their doors to in-person visitors. The aforementioned sites are key sales channels where Coca-Cola’s beverage portfolio is purchased and consumed.

The economic reopening rebounds in sales of these channels and leads to the outperformance of Coca-Cola stock. Indeed, the favorite of Warren Buffett reaches records in 2022.

KO data by YCharts

Record share price fueled by sales and earnings growth

In Coca-Cola’s fiscal year 2021, which ended Dec. 31, revenue rose 17% to $38.7 billion. Impressively, that was higher than the $37.3 billion reported in 2019, before the outbreak. I say impressively because the operating disruptions caused by the pandemic affected its last fiscal year, and yet it beat 2019 sales figures. Coca-Cola expects the momentum to continue through 2022 and expects mid-term sales growth of 7.5%.

KO Earnings Chart (Annual)

KO Earnings Data (Annual) by YCharts

A significant part of its growth was due to the pricing power of Coca-Cola. The coronavirus pandemic is causing supply chain disruptions around the world. As you may remember from the introduction to economics, when supply goes down, prices go up. Coca-Cola has offset some of the effects of rising inflation by passing on higher costs to consumers. All this contributed to increase the bottom line; Coca-Cola’s earnings per share of $1.68 in 2021 was the highest in a decade. Like sales, management expects earnings to increase in 2021 as economic reopening progresses in more parts of the world.

The market also appreciated the steps taken by Coca-Cola to diversify its portfolio away from sugary soft drinks. Last November, the company paid $5.6 billion for the remaining 85% stake — in addition to the 15% it already owned — in Bodyarmor, a sports performance drink company. The acquisition highlights management’s understanding that consumers are looking for healthier options.

A person holding a bottle of Coke.

Image source: Getty Images.

Coca-Cola stock is getting expensive

Graph from KO Price to Free Cash Flow

KO Price to Free Cash Flow Data by YCharts

The rising share price allowed Coca-Cola to trade at price-to-earnings and price-to-free cash flow ratios of 29 and 26, respectively. Beyond the recovery in sales fueled by the economic reopening, investors cannot expect strong sales growth from Coca-Cola. Over the past decade, revenues have declined at a compound annual rate of 1.8%. Admittedly, the growth figures are distorted by acquisitions and disposals. Still, this highlights the company’s difficulty growing revenue organically.

Investors interested in starting a position are best served while waiting for a pullback in the stock price. Similarly, investors may feel better about adding stocks if the stock price remains stable and the company is generating better earnings and free cash flow. That said, don’t be surprised if the stock continues to hit near-term all-time highs.

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Parkev Tatevosian owns Coca-Cola. The Motley Fool owns and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short puts in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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