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Why Coca-Cola Was Down

By Chris Hill - Updated Apr 23, 2020 at 9:02AM

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Our analysts explain why they think Coca-Cola stock took a hit in the first quarter.

In this episode of MarketFoolery, Chris Hill and Motley Fool analyst Bill Barker look at the latest business headlines from consumer staples, technology giants, and car rentals. They also go through some earnings reports, announcements, and much more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on April 21, 2020.

Chris Hill: It's Tuesday, April 21st. Welcome to MarketFoolery. I'm Chris Hill, with me Mr. Bill Barker. Good to see you.

Bill Barker: Good to see you.

Hill: We've got some earnings. We've got some announcements -- let's just call it announcements. We're going to start with Coca-Cola (KO 0.29%).

First-quarter profit and revenue for Coca-Cola came in higher than expected. What stood out to you in this report? Because what stood out to me was how much Coca-Cola depends on what they refer to as the away-from-home channel.

Barker: Yeah, I think in terms of -- once you hear it, it becomes, kind of, what you might have expected if you had been thinking a lot about the business of Coke. But the away-from-home channel is off, I think, 50% since global lockdowns and stay-at-home has occurred. So, the numbers for the whole quarter don't come out really nearly as badly because people stocked up for Coke and water and orange juice. And now their having stocked up, not going to be buying as much, but this whole away-from-home, you're talking about theaters, you're talking about sporting events, you're talking about convenience stores, picking something up at the gas station, all of that is way, way, way off -- 50% for a company the size of Coke, that's pretty impressive.

Hill: Yeah, I mean, you throw in restaurants and bars and it's -- as you said, once you start to think about it, it makes perfect sense. And I'm curious to see how quickly they can bounce back from this. And I guess we're going to get at least an additional datapoint this weekend when the state of Georgia opens for business to a degree that a lot of other states are not open. And we see, well, how many people are going back to these venues? And what is the activity like? Because you can wave a magic wand and say we're going to open up all the restaurants and bars, I still think the majority of people are just going to stay right where they are. And I think that for Coca-Cola it's good that they've got the distribution network they have, because it seems like the away-from-home channel is going to be slow to ramp back up.

Barker: So, Georgia -- well, you know, if you're going and you're getting a tattoo or you're getting a massage, because those are two of the main things that are being opened in Georgia. Of course, you're going to have a Coke, so that's got to help.

Hill: Gymnasiums as well, you know, Planet Fitness.

Barker: Exactly. I mean, who's not working out with a couple of Cokes?

Hill: No, to be fair, they do have Dasani, their water brand, so ...

Barker: Yes. And it is the home of Coke: Atlanta, Georgia. And then restaurants, I think, are opening up but not bars in the Georgia order. You know, this is a fraction of a fraction of their global sales, but places around the world are slowly opening up as other places in other hemispheres are locking down more. So, I mean, there's going to be a rolling improvement in small locations and geographies while others are coming down.

And the result of that is, for Coke, as it is with so many others, you know, we can't give guidance right now. So, that's part of the hit that the share price took earlier. It's not that big a deal, but I think that it's off 1% or 2%. Other, sort of, consumer staples are still able to, in many cases, give guidance and Coke is not because of the degree to which it's tied into entertainment. You know, its major push for advertisement this year, of course, was going to be the Olympics, that's off the table. They'll save some money on the advertising, but that was the 2020 plan to organize around the Olympics.

Hill: Well. And when you talk about consumer staples companies maintaining their guidance. Today, we also had J. M. Smucker come out and their second quarter earnings report doesn't come out, I think, for another four or five weeks, but Smucker raised its guidance for the rest of the fiscal year. I was a little surprised by that until I remembered that J. M. Smucker also has a pet food segment under their brand umbrella, and the pet food segment has to be helping them.

Barker: Has to be. Yeah, people stocked up. One of their brands is Milk-Bone. I know our dogs are getting more Milk-Bones right now every day then they typically get. Giving them some treats, hopefully, my kids are giving them some Milk-Bones right now to keep them quiet while we record. And that's -- actually a fairly large part of the business is the pet brands, not just Milk-Bones but 9Lives and a number of other things.

And also, people are getting dogs. There is good news for pet shelters, that a number of people have gone and found a pet there. And anyway, that's a little bit marginal for Smucker but good news for dogs around the country.

Hill: Let's segue as smoothly as possible from dogs to IBM (IBM -0.90%), because IBM's first quarter revenue fell more than 3%. This is the last quarter for Ginni Rometty as CEO. Arvind Krishna is taking over. And not to bash Ginni Rometty, but when you look at the stock performance of IBM over the last five, 10 years, new leadership is needed and in Krishna they're getting someone who's got 30 years of experience at the company, most recently as senior VP and director of research. And they're going to need some magic innovation dust at IBM to materially move this stock higher.

Barker: Yeah, I suppose. They're a little behind, of course, on cloud, although that is the part of the business that is growing. There are a lot of other parts and it's spread out in a number of different technology and software divisions. You know, there are large parts of budgets which are not going to be spent on big software upgrades right now. Companies -- I think, the word that IBM said of their customers -- are in cash conservation mode. That makes sense, you got a lot of businesses small/medium that don't have cash to invest in upgrades right now. They've got to make sure that the connectivity that they need to have their employees working is up-to-speed. But all in all, what you're finding is it's going to be another challenging year for IBM following many others, most of which, as you say, Rometty was around for.

Hill: Do you get the sense that there are financial levers that IBM can pull to reward shareholders, whether it's increasing the dividend, increasing buybacks? I know that we're at a point-in-time where increasing share buybacks is seen as one of the worst things a company can do, but I'm just trying to think through, like, what is, other than preservation, because it seems like IBM is a steady business and you're not -- you know, the old saying that a mutual fund manager never got fired for buying shares of IBM. I think that still seems to hold true today. I'm just wondering what is the bull case for buying this stock?

Barker: Yeah, I would be wondering what the bull case for buying this stock is too. And I suppose, if you want to hang your hat on new management could do better than old management then that's, I think, a drum that you've been beating about IBM, potentially. The dividend has been pretty secure, been raising it, you know, over the years. I don't know that I would get cavalier with buybacks right now. In fact, one of the things that is down, and expected to be down for the year, is the financing division of IBM, which is going to be scaling back on how it supports and funds its customers' purchases. So, they're in a little bit of cash conservation mode themselves.

Hill: Well, let's move on then to Hertz (HTZG.Q). Hertz announced they're laying off 10,000 employees, which the last time I saw headcount at Hertz it was about 18 months ago and they had somewhere in the neighborhood of 37,000 employees. That's an enormous number on a percentage basis for Hertz to lay off. And I know that when you're in the business of renting cars to people at a time when no one is traveling, things are really bad, but that's a big move by Hertz.

Barker: Yeah. No matter what the top-line number is on employees, a 10,000-employee reduction is major. And I'm almost surprised if it's only a quarter of the workforce, given that the standstill that must be going on with their business as nobody is really flying and that's a major part of their customer base, and people are not otherwise renting cars to make trips of any kind.

Of course, longer-term Hertz has been under tremendous pressure from Uber and Lyft, and I don't know whether your experience is the last couple of times that you've flown, that you've used Uber or Lyft entirely instead of renting a car, which you might have done in the past. That's been my experience and the experience of a huge number of others. And I don't know that Hertz's business model survives 10 years certainly, and you know, even five.

Hill: Yeah, it's interesting, because I've definitely had those experiences in the last year or so where I've maybe flown up to Boston just by myself and decided, "Well, I won't rent a car, I'll just use Uber and some combination of the subway and Uber." But I actually have been thinking [laughs] about car rental for this year in lieu of flights. There are a couple of trips I'm hoping to make later this year. And when I think about them at this point in time, I'm seriously considering saying, "You know what? I'm just going to rent a car and I'm going to drive eight hours, 10 hours," something like that. I would rather do that than get on a plane.

Barker: Okay. And you probably wouldn't take Uber for a 10-hour ride if you're even marginally intelligent.

Hill: Yeah, no, this is --

Barker: Like, what would that cost? You know these things, a 10-hour ride, what does it cost on Uber?

Hill: On Uber? I don't know. The only example I can think of is in the movie Splash when Tom Hanks' character early in the movie gets drunk and he's in New York City and he takes a cab, I think, to Cape Cod. And the cab driver thinks he's joking around, and he holds up a huge wad of cash and, you know, off they go. But, yeah, no, I'm not taking an Uber or a Lyft from Northern Virginia to Nashville, Tennessee.

Barker: Well, it was a different time. That's back when people generally carried around huge wads of cash, there were more mermaids. I mean, try telling the kids nowadays about what was going on back then, they won't believe you.

Hill: Thank God we have the movie as proof of what actually happened, because I think it's a documentary.

Barker: Digitally altered, as you may have read.

Hill: I think I did read something about that. Is that because it's a Disney movie? Like, does Disney own it and so therefore we're going to digitally alter so we don't see Daryl Hannah's backside?

Barker: Yes, yes, precisely.

Hill: I mean, that's a choice that you can make, but it's the wrong choice. If you decide to want to just interfere with great art, I suppose you can do that.

Barker: I mean, the next thing you know, they'll be digitally altering the wad of cash to try to make that sense too, you know. Like, they'll be holding up, you know, their Apple Pay thing just so people understand what's going on.

Hill: Yeah, that's not as dramatic in a movie to hold up, like, you know, your phone, and it's like, "Oh, here's my Apple Pay," "Here's my PayPal," as opposed to here's a fist full of cash. Clearly, we're at the end of talking about investing. And from the sound in the background there, it sounds like your dogs need some more Milk-Bone products.

Barker: Yeah, we're going to have to let Owen have a couple of more Milk-Bones if we're going to have any peace in this house the rest of the day.

Hill: Bill Barker, thanks for being there.

Barker: Thank you.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.

Bill Barker owns shares of Apple and Walt Disney.Bill Barker is an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Bill Barker and Motley Fool Asset Management are not the views of The Motley Fool, LLC and should not be taken as such. Chris Hill owns shares of PayPal Holdings and Walt Disney. The Motley Fool owns shares of and recommends Apple, PayPal Holdings, Planet Fitness, and Walt Disney. The Motley Fool recommends Uber Technologies and recommends the following options: long January 2021 $60 calls on Walt Disney and long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Coca-Cola Company Stock Quote
The Coca-Cola Company
$63.15 (0.29%) $0.18
Apple Inc. Stock Quote
Apple Inc.
$163.86 (-0.61%) $-1.01
International Business Machines Corporation Stock Quote
International Business Machines Corporation
$129.78 (-0.90%) $-1.18
The Walt Disney Company Stock Quote
The Walt Disney Company
$107.47 (-1.51%) $-1.65
The J. M. Smucker Company Stock Quote
The J. M. Smucker Company
$133.82 (0.50%) $0.66
Hertz Global Holdings, Inc. Stock Quote
Hertz Global Holdings, Inc.
Uber Technologies, Inc. Stock Quote
Uber Technologies, Inc.
$31.07 (-2.43%) $0.78
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$94.81 (-1.51%) $-1.45
Planet Fitness, Inc. Stock Quote
Planet Fitness, Inc.
$76.64 (-5.49%) $-4.46
Lyft, Inc. Stock Quote
Lyft, Inc.
$19.21 (-3.11%) $0.62

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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