Is It Time to Invest in the Coca-Cola Portfolio?    

Coca-Cola’s minority investments make potentially interesting side bets

As investors get more nervous about the U.S. trade war with China, defensive plays such as Coca-Cola (NYSE:KO) have become more popular. Up 27% (including dividends) over the past year through August 30, KO stock continues to generate significant attention from investors.

ko stock Coke stock coca cola stock
Source: Fotazdymak / Shutterstock.com

Before you buy Coca-Cola stock and throw it in a drawer, you might also want to consider investing in the entire Coca-Cola portfolio. Here’s why.

The Sum of the Parts

Coca-Cola’s equity method investments generated $75.5 billion in revenue in 2018, along with $7.5 billion in operating income. 

Coca-Cola’s major equity method investments include 19% of Coca-Cola European Partners (NYSE:CCEP), 19% of Monster Beverage (NASDAQ:MNST), 20% of AC Bebidas, Arca Continental’s (OTCMKTS:EMBVF) beverage business, 28% of Coca-Cola Femsa (NYSE:KOF), 23% of Coca-Cola HBC (OTCMKTS:CCHGY), and 18% of Coca-Cola Bottlers Japan (OTCMKTS:CCOJY).    

Coca-Cola currently trades at 7.1 times sales. Assuming its equity method investments were one entity and also sold at 7.1 times sales, they would have a market cap of $536 billion, or more than double Coca-Cola’s entire valuation. 

Not mentioned in the six equity method investments from above is Coca-Cola Consolidated (NASDAQ:COKE), the largest Coca-Cola bottler in the U.S. Coca-Cola owns 35% of its stock. 

Here’s the market cap valuation of all seven equity method investments (Source: Morningstar and Wall Street Journal):

Company Market Cap Coca-Cola’s Interest
Coca-Cola European Partners $26.0B $5.0B
Monster Beverage $31.6B $6.1B
AC Bebidas  N/A N/A
Coca-Cola Femsa $12.3B $3.4B
Coca-Cola HBC $11.0B $2.5B
Coca-Cola Bottlers Japan $3.9B $702.0M
Coca-Cola Consolidated $3.2B $1.1B

The only holding that I wasn’t able to come up with an approximate valuation is AC Bebidas. That’s because it’s an 80% –owned subsidiary of Arca Continental, which has other interests in addition to its beverage business. 

That said, the company’s beverage business accounted for 89% of its 2018 revenue. So, let’s assume its valuation is 89% of its $9.2 billion market cap, which means Coke’s 20% interest is worth approximately $1.6 billion. 

In total, the seven equity method investments are worth approximately $20.4 billion, $1 billion higher than the carrying value of $19.4 billion, which doesn’t include minority investments in BodyArmor and its other growth ventures. 

KO Stock Performance vs. Equity Investments

As I said in the beginning, Coca-Cola stock has generated a total return of 27% over the past year, 193 basis points better than the U.S. total market. 

How have the other stocks performed?(Source: Morningstar 1-Year returns)

Company 1-Year Total Return
Coca-Cola European Partners 34.5%
Monster Beverage -3.7%
AC Bebidas  -17.4%*
Coca-Cola Femsa 0.6%
Coca-Cola HBC 5.5%
Coca-Cola Bottlers Japan -26.9%
Coca-Cola Consolidated 99.1%

You’ll notice an asterisk beside AC Bebidas’s total return. That’s because I used its parent, Arca Continental’s one-year return, and that’s based on its performance on the Pink Sheets. Its performance on the Mexico Bolsa was -17.6%, so it’s reasonably accurate. 

The performance of the seven stocks was either good — COKE up 99.1% — or bad — CCOJY was down 26.9%. 

Overall, based on a $1,000 investment for all seven stocks, they generated a total return of 13.1%, about half Coca-Cola’s total return over the past year.

The Bottom Line on KO Stock

While some of the seven Coca-Cola equity investments have done poorly over the past year — Monster would be at the top of the list of disappointments — I wouldn’t bet against some of them rebounding over the next 6-12 months. 

That being said, it’s a heck of a lot easier to make a single investment in KO stock, stick it in a drawer, and enjoy a steady stream of dividends and capital appreciation over the next 3-5 years or longer.  

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/is-it-time-to-invest-in-the-coca-cola-portfolio/.

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