Long-Term Financial Analysis Of Coca-Cola

Long-Term Financial Analysis Of Coca-Cola
May 16, 2011

Here is a long-term analysis of the Coca-Cola Company (KO). The article gives investors an overview of the company’s financial history, business diversification as well as the valuation level and dividend policy.

Company Profile: 

The Coca-Cola Company is a non-alcoholic beverage company that serves more than 500 non alcoholic brands. Coca-Cola Company has operations in more than 200 countries and employs more than 139,600 people. It owns and markets sparkling beverage brands, including Diet Coke, Fanta and Sprite. In addition, Coca-Cola manufactures, markets and sells beverage concentrates.

Business Diversification: 

As of the latest quarter, the company operated in six segments: Eurasia & Africa (6% of sales and 10% of profits), Europe (11% of sales and 27% of profits), Latin America (11% of sales and 28% of profits), North America (43% of sales and 18% of profits), Pacific (11% of sales and 17% of profits) and Bottling Investments (18% of sales and 0% of profits). In fiscal 2010, roughly 70% of sales came from abroad. Due to the acquisition of the North American bottling company, Coca-Cola generates more revenues in USD.





Valuation of the Company: 

Dividend Yield: 2.76% / 2.75% expected

Payout Ratio: 34.78%

5-Year Dividend Growth: 9.26%

Market Capitalization: 156.08 Billion

Cash and Short Term Investments: 12.27 Billion

Long-Term Debt: 12.68 Billion

Cash flow from Operations: 9.5 Billion

CAPEX: 2.2 Billion



All pricing measures decreased over the past ten years. Price to earnings fell by 55%, price to book ratio slipped in total 53%, price to sales ratio decreased 28% and price to cash flow ratio is finally 36% lower than 10 years before.

Long-Term Fundamentals and Dividends:



The company had a strong track record. Sales of Coca-Cola rose 100% over the past decade. Earnings before taxes and interest (EBIT) increased by 151% and net income finally grew in total 196%. Due to share buybacks, earnings per share rose 216%.



Coca-Cola paid dividends since 1893. The company raised dividends for 48 consecutive years. The next Ex-Div. Date is June 13, 2011. Payments will be received on July 01, 2011. The next dividend is the second quarter dividend at the same rate ($0.47).





Competitors:

The Coca-Cola Company has with PepsiCo (PEP) a big rival in North America and abroad. Additional national competitors are Hansen Natural (HANS) and Dr. Pepper Snapple Group (DPS).

Consensus Developments:

According to Reuters, 18 analysts covered Coca-Cola and submitted an outperform rating with a mean target price of $75.43 as of May 13, 2011. This value represents an upside of 10.6% compared to the close end price of May 13, 2011. The mean target price estimate increased over the past 18 months by 23.8%.

Related Stock Ticker Symbols:KO, PEP, HANS, DPS

Full Disclosure: Long Coca-Cola, not intended to buy any stocks or obligations of the company within the next 72 hours. I don’t receive any compensation by the company.

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Disclaimer:

The presented data and material is for informational purposes only. Despite careful research, we cannot guarantee the truth of the figures. The past operational performance as well as the stock performance and dividend developments does not guarantee a positive future performance. Please, before you buy or sell any stocks, you should do your own research and reach your own conclusion.

About the author:
I am a private full time investor searching for investments and investment ideas.

http://www.gurufocus.com/news/133348/longterm-financial-analysis-of-cocacola

Coca Cola Business at a Glance

http://www.cokecce.com/crs-reports/2009/g_business_glance.html

Insightful Discussion on Portfolio Rebalancing, Intrinsic Value and Value Investing

Portfolio Rebalancing


Quote:

Putting thought into your investments is critical, it is also the antithesis of buy and hold. I believe it was Buffet who said that knowledge is your best hedge against risk. My point in the rebalancing comment is that if you have investments at historical highs such as equities in the late 90's and you take some of your capital gains and put those into Reits or physical real estate or some other true diversification from equities, you stand a better chance of protecting those profits from an equity correction. I am talking about long term trends of 5 to 20 years.


Reply:

March 1985 the S&P 500 hit an all time high of 183. It broke 300 two years later. July of 1989 it hit an all time high of 346. It proceeded to regularly make all time highs for about 13 years straight after that. Why would you want to rebalance out of that market? BTW, the mid to late 80s is when Buffett was making big commitments to Coke, among others. He never rebalanced out of those positions and still sits on huge profits today.

Ben Graham (or Buffett) would say the time to sell is when your estimated valuation of the stock is close to it's price. If the company (Coke for example) keeps increasing in value, and price never catches up, the time to sell is "never".

Of course, with Coke, Buffett didn't sell even when price clearly exceeded value around 2000. He freely admits that was a big mistake, partly driven by having his hands tied as a board member.



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Portfolio Rebalancing

Quote:

Your statements about options are correct, as far as they go. Covered calls are not a good solution in bull markets, but if your of a mind to hold a large stock position come hell or high water, and you find yourself in a sideways to down market, covered calls can be one way to lower your holding costs.

Personally, I am more of a trend following investor who prefers to time my entries and exits using a quantitative trend following model, using options purely as leveraged long plays if at all.


Reply:

Ben would say you never know whether a sideways or down market will continue, or when it will stop. Ben (and Warren) believes you can't predict trends, that it's better to use value as your guide and trust the market will eventually recognize that value.


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Intrinsic Value and Value Investing

Quote:

I am somewhat sceptical of anyone talking about value stock investing at the current valuations as I feel they are just below all time historical highs and have quite a bit of downside before they can called value stocks in the historical sense.


Reply:

The commonly used term "value stocks" has little to do with value investing. Academics describe value stocks as stocks with low PE or low price to book. That's not even close to true. Buffett paid an above market PE for Coke when he bought it, and with a large price to book.

Value investing simply means every stock has an intrinsic value (IV) separate from it's price. Value investors try to buy stocks trading at a discount to their intrinsic value. Some stocks are bad "value stocks" because they are either over priced, or their IV is difficult to estimate. But at the right price, any stock is a value stock.

And the fact that the market has reached a historical high recently is neither evidence stocks are over-valued or under-valued. Their true value is based on the discounted value of their future stream of earnings. The Dow recently hit a peak it hand't seen for over 5 years. I don't know if at that price the Dow is fairly valued or not, but I am certain it is much more valuable than it was 5 years ago, simply because it's earnings are higher.

As we get farther in TII, more of these concepts will become apparent.

http://archives1.twoplustwo.com/showflat.php?Cat=0&Number=5610779&page=0&fpart=all&vc=1

Buffett (1988): Arbitrages and Efficient Market Hypothesis

From Warren Buffet's 1987 letter to shareholders, we got to know his preference for businesses that are simple and easy to understand. In the same letter, Buffett also explained the concept of 'Mr Market' in a rather detailed way. Let us now see what the master has to offer in his 1988 letter to shareholders.

The year 1988 turned out to be quite an eventful one for Berkshire Hathaway, the master's investment vehicle. While the year saw the listing of the company on the New York Stock Exchange, it also turned out to be the year when Buffett made what can be termed as one of its best investments ever. Yes, we are talking about the company Coca Cola. The letter too was not short on investment wisdom either. Although he did discuss previously touched upon topics like accounting and management quality, these are not what we will focus on. Instead, let us see what the master has to say on some novel concepts like arbitrage and his take on the efficient market theory.

For those of you who would have thought that Warren Buffett is all about value investing and extremely lengthy time horizons, the mention of the word 'arbitrage' must have come as a pleasant surprise or may be, even as a shock. However, the master did engage in 'arbitrage' but in very small quantities and this is what he has to say on it.

"In past reports we have told you that our insurance subsidiaries sometimes engage in arbitrage as an alternative to holding short-term cash equivalents. We prefer, of course, to make major long-term commitments, but we often have more cash than good ideas. At such times, arbitrage sometimes promises much greater returns than Treasury Bills and, equally important, cools any temptation we may have to relax our standards for long-term investments."

First of all, let us see how does he define arbitrage.

"Since World War I the definition of arbitrage - or "risk arbitrage," as it is now sometimes called - has expanded to include the pursuit of profits from an announced corporate event such as sale of the company, merger, recapitalization, reorganization, liquidation, self-tender, etc. In most cases the arbitrageur expects to profit regardless of the behavior of the stock market. The major risk he usually faces instead is that the announced event won't happen."

Just as in his long-term investments, in arbitrage too, the master brings his legendary risk aversion technique to the fore and puts forth his criteria for evaluating arbitrage situations.

"To evaluate arbitrage situations you must answer four questions: 

• (1) How likely is it that the promised event will indeed occur? 
• (2) How long will your money be tied up? 
• (3) What chance is there that something still better will transpire - a competing takeover bid, for example? and 
• (4) What will happen if the event does not take place because of anti-trust action, financing glitches, etc.?"

And how exactly does he differ from other arbitrageurs? Let us hear the answer in his own words.

"Because we diversify so little, one particularly profitable or unprofitable transaction will affect our yearly result from arbitrage far more than it will the typical arbitrage operation. So far, Berkshire has not had a really bad experience. But we will - and when it happens we'll report the gory details to you."

"The other way we differ from some arbitrage operations is that we participate only in transactions that have been publicly announced. We do not trade on rumors or try to guess takeover candidates. We just read the newspapers, think about a few of the big propositions, and go by our own sense of probabilities."

Another important topic that the master touched upon in his 1988 letter was that of the Efficient Market Theory (EMT). This theory had become something like a cult in the financial academic circles in the 1970s and to put it simply, stated that stock analysis is an exercise in futility since the prices reflected virtually all the public information and hence, it was impossible to beat the market on a regular basis. However, this is what the master had to say on the investment professionals and academics who followed the theory to the 'Tee'.

"Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day."

In order to justify his stance, the master states that if beating markets would have been impossible, then he and his mentor, Benjamin Graham, would not have notched up returns in the region of 20% year after year for an incredibly long stretch of 63 years, when the market returns during the same period were just under 10% including dividends. Hence, despite evidences to the contrary, EMT continued to remain popular and forced the master to make the following comment.

"Over the 63 years, the general market delivered just under a 10% annual return, including dividends. That means US$ 1,000 would have grown to US$ 405,000 if all income had been reinvested. A 20% rate of return, however, would have produced US$ 97 m. That strikes us as a statistically significant differential that might, conceivably, arouse one's curiosity. Yet proponents of the theory have never seemed interested in discordant evidence of this type. True, they don't talk quite as much about their theory today as they used to. But no one, to my knowledge, has ever said he was wrong, no matter how many thousands of students he has sent forth misinstructed. EMT, moreover, continues to be an integral part of the investment curriculum at major business schools. Apparently, a reluctance to recant, and thereby to demystify the priesthood, is not limited to theologians."

http://www.equitymaster.com/detail.asp?date=9/13/2007&story=3

How to Make Money The Buffett Way

http://www.equitymaster.com/ptmail/sep09/buffet_newsubs.html

Stop wasting so much time and energy trying to find 'that' perfect stock. Instead discover...





How to Make Money
The Buffett Way
Simply put, we will be identifying companies that are doing simple businesses that can be easily understood, have consistent earnings history and sustainable growth path, are managed by honest and competent people, and whose stocks are available at attractive prices with an adequate margin of safety. 
After all, Buffett has made his entire fortune - US$ 37 bn at last count - following these very principles of investing.

And he's achieved tremendous success with not one, not two, but several stocks that have multiplied several times over a number of years. 
Like his investment in Coca-Cola, where every 100 dollars he invested in 1988 now stands at nearly 1,500 dollars...or simply put, an investment that has multiplied 15 times in around 21 years! See this...


Data Source: Yahoo Finance
Among other reasons, the key factor that prompted Buffett to buy Coca-Cola (as he later clarified) was that he believed in the simplicity and sustainability of its business.
But before that...

You know, the 15 times return on Coca-Cola is just among the lesser returns that Buffett has made over the years. Washington Post, the newspaper company that he started acquiring in 1973, has till date multiplied his money a whopping 81 times! And this is keeping out the significant dividends that the company has paid out over these years.


Data Source: Yahoo Finance
As per the reasoning he later offered, Buffett bought Washington Post simply because the company, apart from doing good business, was selling at a much lower price than its true business value.

'The Value Investor' will emulate Buffett's mantra of buying stocks when they are selling cheap as compared to their true worth.

Another of Buffett's investments that turned extremely successful was 'Gillette', the shaving products major. Buffett's simple reasoning to buy Gillette can be summed up in his own words - "I go to sleep in peace every night realising that every morning when I wake up, millions of men will wake up with me and shave."

Not to mention that Buffett multiplied his investment in Gillette almost 9 times in 14 years.

So How Can Buffett's Teachings Help You Build A Portfolio
That Can Multiply Your Wealth Several Times
Over The Next Five To Ten Years?
Now For Your Biggest Question...
"Why Should I Do This?"
Okay, let us put it the other way - what could be the opportunity loss for you for not practicing 'The Value Investor' strategy and otherwise following the herd?

See this chart...


Data Source: Berkshire Hathaway's 2008 annual report
The above chart depicts the increase in book value per share of Buffett's company Berkshire Hathaway vis-à-vis the performance of S&P 500 during the period 1964 to 2008.

While the S&P 500 multiplied by around 42 times during this period, Berkshire's book value multiplied 3,400 times! 

Coke to invest RM1b in Malaysia

Coke to invest RM1b in Malaysia

UPDATED

By Lee Wei Lian

NILAI, March 16 — Global beverage company Coca-Cola plans to invest more than RM1 billion in Malaysia over the next five years including the construction of a new bottling facility in Nilai.

The investments are expected to cover both marketing and manufacturing.

The new plant in Nilai will cover 123,024 square metres and will employ between 600 and 800 workers. It is also expected to create between 6,000 and 8,000 jobs with local suppliers.

“This RM1 billion investment represents the Coca-Cola system’s strong commitment to Malaysia and its consumers in delivering refreshing beverage choices, creating job opportunities and helping in building a better community,” said Glenn Jordan, president of the Pacific Group of The Coca-Cola Company at the ground-breaking ceremony of the new plant here today.

Jordan said the investment is the largest incremental investment it has made in the country.

He added that more than 90 per cent of the raw materials required would be sourced locally.

“This will enable us to produce the wide variety of beverages under the ‘non-alcoholic ready to drink’ category in which The Coca-Cola Company is a leader in terms of sales, innovation and marketing... in Malaysia as well as globally,” said Jordan.

The new facility will also practise rainwater harvesting and meets the Silver Leadership in Energy and Environment Design (LEED), the first Coca-Cola plant in Southeast Asia to achieve this standard.

The opening of the plant was officiated by Prime Minister Datuk Seri Najib Razak, who said he met Coca-Cola in Singapore last year and encouraged it to invest in the Nilai plant.

“I am happy to see that in just four months, the plant has become a reality,” he said in his speech at the ground-breaking ceremony.

“I believe in associating Malaysia with one of the world’s most recognised brands. Malaysia will benefit from Coca-Cola’s presence and vote of confidence. I hope it will be a shining example for others to follow.”

Coca-Cola has been in Malaysia since 1936. Its brands include Diet Coke, Sprite and Minute Maid.