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Watch Out Below For Coca-Cola (KO)

Watch Out Below For Coca-Cola

Coca-Cola (KO) has been under pressure for a few years.  

KO is up roughly 33% since 2012. The S&P 500 is up roughly 88% over the same time frame.

They have sought to streamline their business and have divested a lot of assets. But the clouds are still dark for Coke.

KO has three major problems:

  1. Aggressive competitor: Pepsi (PEP) is very aggressive.  And very diversified: in addition to drinks they offer snack foods (Frito-Lays), granola bars & cereals.  KO does just beverages
  2. Soft drink tax: Cities have begun to tax soft drinks, with the inevitable result that sales are falling. By a lot.  Two months after enacting the tax, Philadelphia saw soda sales drop 30%+. Canada Dry is laying off 20% of its workers.  It’s a few million in losses, but it’s spreading to other cities.
  3. End of Food Stamps Benefits: At the height of the recession, US States waived the requirement that food stamp (SNAP) recipients had to (1) have a job, (2) be in training, or (3) provide some community work.  Food stamp recipients shot up from 27M to 47M.  8 years into the recovery, there are still 41M individuals getting food subsidies.

Most don’t realize, but food stamps are big business: about $71 billion (B) in annual support.  

Food stamp subsidies have more than doubled since 2007 (at $30B.)   

If you really want to get pissed off at program wastage… administrative costs have also doubled – from $2.4B annually to $4.8B.)  

In past economic cycles, Food Stamp participation drops back to pre-recession levels within 2-3 years of the recession. 

That stopped with the 2001 recession. Why? Because big business stepped in.  

A cool $50B per year of government money is being funneled to a handful of companies. These companies spend millions themselves in lobbying to keep the largess going.

Almost half of food stamp money is spent on candy and – wait for it – soft drinks.  

Walmart is the biggest beneficiary. They get 18% of the total.

Amazon sees this big piece of the pie and wants in. Now, Prime members who use their SNAP card get a 45% discount on food and soft drinks.

But changes are coming.  

States like Alabama and Georgia (among others) have reinstated the basic requirements to qualify for food stamps.  

Remember, this isn’t hitting hardship cases. The rules are very gentle. If you are able-bodied, then you don’t get a free ride.

Work, show proof that you are trying to work, or provide the community with 20 hours of monthly public service (one afternoon per week).  Participation has collapsed.  Alabama alone saw 85% drop in participation. Georgia 62%

As a major recipient of the spending, KO is about to face billions in falling sales.

KEY TAKEAWAY: Coca-Cola is in for a rude awakening with the food stamp regulatory changes. Taxes on soft drinks. And competition from Pepsi. All are big negatives for the stock.

Meanwhile, it’s trailing price-to-earnings ratio is 31. Its price-to-sales is just under 5.

Want to pay that much for a company with falling revenue and earnings? Didn’t think so.

Avoid the stock ahead of earnings July 26th.

 

Best,

Andrew Zatlin

Editor of Moneyball Economics

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