Coca Cola Consolidated Is a Buy Thanks to a Huge Free Cash Flow


Coca-Cola Consolidated (NASDAQ:COKE) is the largest bottler of The Coca-Cola Company (NYSE:KO) beverages, as well as those from Dr. Pepper, which is owned by Keurig Dr. Pepper (NASDAQ:KDP). In addition, it bottles Monster beverages, which The Coca-Cola Company owns. Recently COKE stock, which is separate from KO stock, is trading at an extremely high free cash flow (FCF) yield, making it a good bargain.

Coca-Cola Consolidated sign outside of their building. COKE Stock.
Source: Jonathan Weiss / Shutterstock

Moreover, COKE stock has fallen dramatically from its peak of $625.77 on Jan. 6 to $472.11 as of Mar. 9. That represents a drop of 24.6% in just two months.

This was mainly as a result of its earnings announcement which apparently disappointed investors. The net effect, though, was to increase the FCF yield at COKE stock.

Where Things Stand With Coca-Cola-Consolidated

For example, the company’s recent earnings report on Feb. 22 for the quarter and year ending Dec. 31 showed it made $366 million in free cash flow. Compared to its market value on Mar. 9 of $4.15 billion at $472.11 per share, this represents a FCF yield of 8.8%. This is the result of dividing $360 million by $4.15 billion.

This 8.8% FCF yield is an extremely high level for just about any company or stock. In fact, out of that $366 million in FCF, the company pays just $9.4 million in dividends. It certainly has room to do much more than this in the future.

If that were to happen, the dividend yield would increase from its paltry level of just 0.21% (i.e., $1.00 dividend per share / $472.11).

This huge free cash flow also reflects the ultimate cash profitability of the company. There is always a good reason why a stock falls. For example, investors were upset in the earnings report that physical case volume was down 1.7% year-over-year (YOY).

But the company is not going out of business anytime soon. Its powerful FCF now makes it a very good buy for value-oriented investors.

What the Stock Could Be Worth

Morningstar reports that the average price-to-cash flow (P/CF) multiple for COKE stock has been 9.13 times in the past 5 years. How does this compare to the present valuation?

To measure this, we take the market cap of $4.15 billion and divide it by the $521.755 million in cash flow from operations (CFFO). Note that this is not the same thing as FCF, as it does not deduct the capital expenditures from the CFFO.

As a result, the existing P/CF multiple is below 8 times (i.e., $4,150m / $521.755m = 7.95x). As a result, we can estimate that the stock should be worth 14.8% more (i.e., 9.13x / 7.95x). That puts the target price at $541.98 (i.e., 1.148 x $472.11 = $541.98), or roughly $542 per share.

There are really no major analysts covering the stock. So, this is probably a simple way to evaluate the company for most investors.

What to do With COKE Stock

The major question for investors is when will the company decide to increase its dividend? There is presently no indication that the company is considering doing this.

The company has been using most of the FCF it generates to pay off its debt. As it now stands, there is $723 million in long-term debt, not including operating and financing leases. After its cash pile of $142 million is deducted, the net debt is just about $581 million. That could easily be paid off within the next year or so.

This leaves open the possibility that the board of directors could increase the dividend for investors. However, again, there is no indication that this will happen. In fact, the company has kept the dividend steady for at least the last number of years with no prospect or statement from the company about a raise.

The Harrison family controls this company through its super-voting structure and their shareholding in the company’s common and Class B stock. Members of the Harrison family have played an important role in the company since its formation in 1902. J. Frank Harrison III not only is the great-grandson of Coke Consolidated’s founder, as well as the controlling stockholder. He is also the Company’s chairman and chief executive officer. He has been an employee of the Company since 1977.

Whenever the Harrison family decides it is in their best interest to increase the dividend, then it will happen. I suspect that for the time being, though, their main goal lies in debt reduction. Until that changes, the stock could remain cheap. But, it could easily change on a dime as the amount of debt continues to fall.

On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

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