Coca-Cola (NYSE: KO) has been the latest talk for the emerging marijuana sector, yet many have been getting it wrong. The activity clearly shows a focus upon CBD infused coffee not other soft drinks or alcohol alternatives. Marijuana coffee, or its derivative CBD would likely cause a relaxing drink rather than become psychoactive. This CBD-coffee causation fits Coca-Cola's ethos as it has already publicly stated to have no interest in the psychedelic effects of marijuana. The preparation for this transition has already started with a key, but lesser known acquisition of Costa Coffee.
We first learned of Coca-Cola's prep in the August 2018 PR for coffee market share. That was followed by a definitive vote in early October by Costa Coffee's holding company, Whitebread to advance the sale. What the marijuana speculators have failed to realize is the connection between Costa Coffee's footprint (Canada & UK) and those countries legalizing marijuana. According to Coffee and Cocoa International, Costa Coffee advanced from the UK into Canada as early as Spring 2016 with a growth timeline for full 2020 expansion. AS of October 17, 2018 marijuana was legalized by Canada for adult recreational use. The United Kingdom has calendered to legalize medicinal marijuana by November 1, 2018.
According to Neptune Wellness Solutions (NASDAQ: NEPT), a Canada based company: "Within a year of October 17th, the federal government [Canada] is expected to complete the regulatory framework for concentrated [marijuana] extracts including vape pens, edibles, topicals and beverages." This sets the timeline for Coca-Cola and the coffee infusion for Fall of 2019. Meanwhile, the United States has also made some changes.
The FDA and DEA recently agreed on a specific prescription product for the U.S. market containing cannabis extract. This is not the same as national legalization of Marijuana or THC. On the contrary, the regulated product of Epidiolex contains a low concentration of THC (no more than 0.1 percent). What may be deduced is the federal administration moving towards therapeutic legalization of extracts. This would pair well with Coca-Cola's coffee and stress relief targets of the coffee-CBD infusion market. To further support this speculation is Neptune's filing for U.S. patents of cannabis extraction.
Bag holders in small OTC stocks are still hoping their small marijuana or bottling company will be acquired by Coca-Cola. The shocker is that Coke has likely already made its big move via the coffee inroads. According to the earnings calendar, Coca-Cola is scheduled to release its earnings report and conference call on Tuesday, October 30th. The previous earnings report did not mention the marijuana sector or the Costa Coffee M&A. Expect these two keynotes to be included: (1) coffee sector; and (2) marijuana expansion. Further adding to potential momentum is that the company already announced the dividend to remain intact. Coca-Cola declared $0.39/share quarterly dividend, in line with previous with a forward yield 3.42%
The company's free cash flow leading into Q3 earnings is comprised of approximately $7B operating cash flow and ($1.68B) in capital expenses. The Free Cash Flow is $5.32B and when compared to the market capital of $195.51B the FCF Yield is 2.72%. This is an at par valuation, however some of the unrealized value is the prospect in the emerging sector of marijuana infused coffee that Coca-Cola has apparently entered into.
Free Cash Flow is obtained by taking the value of the company's operating cash flow and subtracting from it the value of capital expenses. The yield is then formulated by dividing the result by either the market capital or enterprise value.
During Coca-Cola's earnings call on October 30th, CEO Quincy Jones responded to a question about CBD or marijuana products. He replied, "Well, I think that's a simple one. We don't have any plans at this stage to get into this space. So that's kind of where we are." However, the denial was not believable and possibly to short and lacking detailed or valid dismissal of the obvious signs.
CEO James Quincy interviewed with Jim Cramer on November 16th. Quincy began to walk back some of his earlier sentiment from the past earnings call. This time he explained that CBD had been under review, but that they needed more certainty before using it. "Coca-Cola would only consider incorporating CBD, the plant’s non-active, medically inclined component, in its products." The other details were that Coca-Cola needed the U.S. to make it legal, which federally it had not. In Canada, consumables are scheduled for legalization at a later date, and so the timing had been wrong an infused CBD Coca-Cola drink. In regards to safety the CEO stated, "we want to see consensus science behind any ingredient."
Disclosure: I am/we are long KO & NEPT.