Today we’re looking at Coca-Cola (NYSE:KO). Everyone knows Coca-Cola makes soft drinks, but did you know just how many brands the company actually has?
Many are specific to region, but a quick scan yields these familiar names: Coke, Fanta, Dasani, Bacardi Mixers, Mello Yello, Enviga, Five Alive, Full Throttle, Fuze, Godiva Coffee/Chocolate drink, Hi-C, Lift, Minute Maid, Nestea, Odwalla, Seagram’s, Simply Orange and Smart. No wonder the company still is growing.
The key driving factors for Coca-Cola? Well, people always will be thirsty. Sure, there is some economic sensitivity, but not a whole lot of it. By and large, Coke’s products are cheap in all parts of the world compared to 100% juice or milk or liquor. There are three other factors. The first is competition, but Coca-Cola’s market share has been relatively stable for many years. The second is innovation: The company must be able to introduce new products to keep revenues fizzing and customers from getting bored. The third is continued expansion. And I’m sure Coke won’t be satisfied until there’s a Coke machine under every rock in the every corner of the world.
Stock stock analysts looking out five years on Coca-Cola see annualized earnings growth at 8%. At a stock price of $71, on FY 2011 earnings of $3.87, the stock presently trades at a P/E of 18. Dr. Pepper Snapple Group (NYSE:DPS) and PepsiCo (NYSE:PEP) are the closest competitors, with P/Es of 16 and 15, respectively, so Coke is in line with their valuations.
Coca-Cola carries $14 billion in cash and $11.3 billion in debt at an interest rate of about 6.5%. Trailing 12-month cash flow was $6.5 billion, so the debt service is no problem. The company also had 1.5 times the amount of free cash flow necessary to pay its 2.6% dividend. I just love writing the word “billion,” as nothing gives me greater comfort than seeing that word next to “cash” or “free cash flow.” Coke certainly is it.
Coca-Cola has had four insider purchases of about 629,000 — three of them, comprising the vast majority at 625,000 shares, were made by new board of directors member Barry Diller. That means Diller invested almost $40 million of his own money to come on board. Talk about a vote of confidence! Add in the fact that Warren Buffett owns about 9% of the company, and you must figure that Coke is the place to be.
Conclusion
If we put an 8 P/E on Coca-Cola, I think we are not giving it the deserved premium considering its consistent history of free cash flow, long history of soda expertise, extraordinary management, incredible confidence in the company in the form of Diller and Buffett, and world-blass brand name. I say it deserve a P/E of at least 11.
On projected 2015 earnings of $5.86 per share, factoring in the $1 in net cash, and the 2.7% compounded dividend yield reinvested, we get a price target of right about $70. Uh oh. That’s right where the stock is sitting right now. I guess I’m not the only one that realizes what a great company Coke is. It appears to be fully valued — for 2015.
- I believe Coca-Cola is a hold for regular accounts.
- I believe Coca-Cola is a hold for retirement accounts.
Lawrence Meyers does not own shares of any company mentioned.
