Author: Demitri Kalogeropoulos

Since it isn’t possible to know the timing of the start of any bull market, the trick is to own stocks that can deliver strong returns through a wide range of economic environments. That’s a harder feat than it sounds, though, as few businesses can navigate through swinging consumer preferences and demand.

Coca-Cola (KO -0.25%) has secured a spot near the top of that list of stable winners. The beverage giant for decades has been winning market share in a massive global industry. Its financial strength puts it in a class of its own, too. Let’s look at a few reasons to consider buying this beverage stock now.

Double-digit growth

Don’t let Coke’s size fool you into thinking this isn’t a growth stock. On the contrary, organic sales expanded 12% this past quarter following a blistering 16% increase in the last full fiscal year. The early 2023 growth came through a balance of rising sales volumes and much higher prices. That’s good news considering peers like PepsiCo (NASDAQ: PEP) are relying entirely on increased prices to drive sales.  

The drink giant is seeing strong demand for core brands like Coke, Sprite, and Fanta, which are among the top-selling beverages consumed around the world. Yet it is also using its unparalleled distribution network to capitalize on growth niches like energy drinks, waters, teas, and sports drinks. Wins in these areas have Coke targeting a further 7% to 8% sales uptick in 2023 even as global economic trends slow.

Sparkling finances

Income investors have long been attracted to Coke’s stock due to its rock-solid finances. These positive factors have only improved in recent quarters. Coke is sitting on over $13 billion of cash today and is expecting to generate roughly $10 billion of free cash flow this year.

Operating profit margin in the first quarter improved to 32% of sales from 31% a year ago, at a time when many consumer-facing stocks are reporting weaker profitability results. “We have the right portfolio, the right strategy, and the right execution,” CEO James Quincey told investors back in late April.

Shareholders will see direct benefits from that success as Coke sends those ever-increasing dividend checks. The company has raised that annual payment for 60 consecutive years spanning many recessions and bull markets.

The price and value

As you might expect, Coke stock is valued at a premium that reflects many of these positive investment characteristics. The shares are priced at over 6 times annual sales, or about double Pepsi’s valuation.

Coke delivers twice the profit margin as Pepsi, though, and a portfolio that’s more focused on the beverage industry. This positioning was valuable during the economic expansion in late 2020 and 2021 and will likely pay off for patient investors once the next upswing occurs.

In the meantime, shareholders can simply hold the stock and reinvest Coke’s dividend payments so that returns are amplified over long stretches of time.

Investors were worried heading into the Q1 earnings update from Lowe’s (LOW 2.73%). This announcement arrives just at the start of the home improvement giant’s highest-volume sales weeks in early spring, raising the stakes for its business. And rival Home Depot had complained earlier about softening consumer demand and sales pressures from slumping lumber prices.

Lowe’s followed its larger peer in reducing its fiscal-year outlook on both the top and bottom lines. But does this downgrade change the investing thesis for this successful retailer?

Let’s dive right in.

Lowe’s endures sales pressure

Lowe’s said its business was hit by the same three challenges that featured prominently in Home Depot’s mid-May announcement. Slumping lumber prices compared to a year ago pushed sales lower, executives said in a press release. Revenue through early May was also pressured by some extreme weather in parts of the country, plus weaker demand in many of its consumer discretionary niches.

Overall, comparable-store sales declined 4.3%, compared to Home Depot’s 4.6% drop. Lowe’s CEO Marvin Ellison said, “We are pleased with the performance of our business despite record lumber deflation and unfavorable spring weather.”

Bright spots

Lowe’s did see growth in its professional contractor segment and in its large e-commerce business. But these gains were offset by weaker demand among do-it-yourself shoppers.

The other bright spot in the report is that Lowe’s didn’t take a big hit to profitability. Its gross profit margin held steady at roughly 34% of sales, and expenses declined. These trends resulted in operating income of $3.3 billion, or nearly 15% of sales. That’s an unusually high profit margin for Lowe’s and right on par with Home Depot’s industry-leading results.

Yet the retailer isn’t expecting the good earnings news to carry through into the wider fiscal 2023 year, which is now likely to show weaker profit and sales trends than management originally predicted.

Looking to 2024

Lowe’s reduced its fiscal-year outlook and now expects comps to be lower by between 2% and 4%, compared to its previous range from flat to a 2% drop. Home Depot is calling for a similar decline in 2023 following several years of above-average growth.

Likewise, the industry’s second-largest player reduced its operating profit margin forecast to about 13.5% from the prior forecast of roughly 13.7%. Home Depot is expecting just above 14%, by comparison.

None of these factors materially change the investing thesis for Lowe’s, which includes a mix of solid earnings growth that trails its larger peer. The dividend giant is likely to continue raising its payout each year, as it has for more than 25 consecutive years. And Lowe’s is priced at a discount to Home Depot, with a price-to-sales ratio of about 1.3 compared to the leader’s 1.9.

A tough short-term selling environment might keep the stock off many investors’ list of must-buy stocks, but there’s also no reason to abandon the growth thesis ahead of an eventual rebound in the home improvement industry. Lowe’s remains an attractive investment to hold, especially for income investors seeking a cheaper alternative to Home Depot.