Coca-Cola (KO -1.17%) has thrived since the economic reopening gained momentum. The company gets a meaningful portion of its sales from away-from-home channels like movie theaters, theme parks, and restaurants. Those venues struggled in the pandemic's earlier stages when business restrictions were more common.
The iconic beverage company is scheduled to report fiscal 2022 second-quarter earnings results before the markets open on Tuesday, July 26. Optimism is high for Coca-Cola to report double-digit sales growth. Given that backdrop, it's understandable that investors are asking if they should buy Coca-Cola stock now.
Rising prices and consumer demand is driving Coca-Cola higher
Interestingly, in its most recent quarter, which ended on April 1, Coca-Cola grew revenue by 16% from the same quarter in the prior year. That's a dramatic outperformance for a company that has grown revenue at a compound annual rate of negative 1.8% in the last decade.
Coca-Cola is capturing the benefits of consumers unleashing pent-up demand for away-from-home experiences like watching a ball game, visiting a theme park, and eating with friends at a restaurant. Those are all venues where consumers are more likely to purchase a Coca-Cola product versus competitors. The company has worked over the decades to establish exclusive relationships with businesses like McDonald's and AMC Entertainment Holdings.
In addition to buying more Coca-Cola products, customers were paying more for the privilege. Coca-Cola noted that the price/mix increased by 11% in the quarter that ended in April. The "mix" part of price/mix is where the company changes package sizes to get consumers to pay more. For example, selling Coke in 8-ounce cans where the price per ounce is higher than in a 2-liter bottle.
The combination of growing unit sales and higher prices led the company's operating profit to expand 230 basis points to 32.5% from 30.2% in the same quarter the prior year. That's impressive considering the inflationary environment all businesses find themselves in.
What this could mean for Coca-Cola investors
Analysts on Wall Street expect Coca-Cola to report revenue of $10.52 billion and earnings per share (EPS) of $0.67 in Q2. If the company meets those projections, it will be an increase of 12.9% and a decrease of 1.47%, respectively, from the same period a year before.
The reversal in earnings would be a sharp slowdown from the 23% growth in the metric in Q1. Rival PepsiCo reported its second-quarter results earlier in July, and showed a solid top-line increase, but inflation pressured profitability. Coca-Cola would be hit with the same forces since it sells similar products in similar markets.
That said, the rising inflation is not the only reason to hesitate about buying Coca-Cola stock. A price-to-free-cash-flow ratio of 36.9 is a considerable premium over its rival PepsiCo at 26. Moreover, as the risks of a recession rise, consumers may pull back on the type of away-from-home spending that is benefiting Coca-Cola. At the very least, investors should wait until Coca-Cola's second-quarter earnings are out before considering acquiring shares.