As is happening with more and more companies across the ASX lately, Coca Cola Amatil Ltd (ASX: CCL) was recently forced to withdraw its FY20 earnings guidance in response to the escalating coronavirus pandemic.
It has now joined a fairly illustrious group of companies that have had to do the same: leading ASX healthcare company Cochlear Limited (ASX: COH), Auckland International Airport Limited (ASX: AIA), and digital real estate advertising company REA Group Ltd (ASX: REA) have all withdrawn their FY20 guidance as a result of the coronavirus, showing that no sector of the economy is immune to its effects.
Uncertainty around the impacts of the disease have thrown global markets into turmoil. And while the economic damage from coronavirus will undoubtedly be widespread and ongoing, it’s important to keep a level head and look for pockets of value in the market.
The Coca Cola share price is now close to 40% lower than the 52-week high of $13.18 it reached on 21 February 2020. As at the time of writing, Coca Cola shares are trading at just $8.20, only slightly higher than the 52-week low of $7.77 recorded on 23 March 2020. It represents an incredible loss in value for one of the most recognised brand names on the ASX.
On the one hand, this is understandable. The economy is inching increasingly towards a total lockdown, meaning that Coca Cola is losing a wide array of revenue channels. Restaurants, pubs and bars have all closed in the last week, and sporting and concert events have all been cancelled. The consumer outlook is becoming increasingly bleak.
But it’s important to try and look beyond that. In the company’s results announcement for the 12 months ending 31 December 2019, it reported that almost two thirds of beverage volumes sold across the Australian geography came via grocery stores: 186.5 million unit cases out of a total of 309.9 million unit cases.
And in the announcement the company made to signal its intention to withdraw its FY20 earnings guidance, it noted an uptick in grocery volumes due to consumers stocking up.
This uptick won’t be anywhere near enough to offset sales revenues lost elsewhere, but it could still mean that overall sales won’t be as bad as the fall in the Coca Cola share price might suggest. Customers who previously consumed Coca Cola products at restaurants or events may now instead consume more at home.
Fast food chains like McDonalds and Hungry Jacks are also still operating despite the tightening lockdown. In its FY19 results announcement, Coca Cola called out these chains as driving volume increases in its “On-The-Go” segment.
This will be a difficult year for a lot of companies, Coca Cola included. Despite the government doing its best to prop up the economy through a series of enormous stimulus packages, many people are currently dealing with an uncertain future. Discretionary spending will surely decrease, and retail distribution channels for products like Coca Cola will be severely disrupted. It will be tough to do business as daily life in Australia adjusts to the pandemic.
But even in the most dire predictions, this is still only going to be a short-term shock. It may well have long-lasting economic implications, but the pandemic itself will eventually subside, whether it’s 6 or 12 months from now. Restaurants and pubs will open again, and supply lines will rejuvenate.
In the meantime, Coca Cola still benefits from being one of the most recognisable brands on the planet. These are the cheapest its shares have been for over 12 months, and I think it has been oversold by a nervous market. If you’ve been thinking about adding Coca Cola to your portfolio, now seems like a good time to buy.
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Rhys Brock owns shares of Cochlear Ltd. and REA Group Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. The Motley Fool Australia has recommended Cochlear Ltd. and REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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