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How Much Would You Pay to Own Coca-Cola?
Posted by: Fast Weekly (IP Logged)
Date: October 1, 2013 05:00PM

Coca-Cola (KO) is the Atlanta, Georgia based drink conglomerate. Coke is one of the world's most recognized brands, but would it make a good investment? I conduct periodic reviews of my holdings, and Coke is one of my largest holdings. Coke's largest shareholder, Warren Buffett, is one heck of an endorsement, but how does the operating business look?

Coca-Cola was founded 1886 and has grown to include such brands as Coca-Cola, Sprite, Fanta, Minute Maid (juices), Desani (Water), Vitaminwater (sports drinks) and Poweraid (sports drinks). At first glance the company looks expensive, currently selling with a P/E ratio of 20, P/B ratio of 5.2 and a price-to-earnings-to-growth (PEG) ratio of 2.33. These metrics look expensive, but let's see what you're getting for your money.

One of my favorite metrics is return on equity (ROE). I want to be sure that the companies I own generating a high rate of return on my equity ownership in the company. You can see the past 10 years of ROE for Coca-Cola below.

These results look good even though the ROE trend line has been decreasing. I generally like to see ROEs of 20% or more, and Coke has been consistently in the high 20% or low 30% for the past 10 years. Next I want to look at Coke's past revenue growth per share, to see if it has demonstrated “top line” growth. Below you can see the revenue growth per share over the past 10 years.

Okay, good. So Coke has been able to more than double its revenue per share over the past 10 years. The rate of increase has slowed in the past couple years which is unfortunate, but not totally unexpected for a company as large as Coke. Let's look at the earnings per share (EPS) and free cash flow per share (FCF) growth.

From the left side of the table above it's clear that the EPS and FCF have each been growing at roughly 10% per year. This is a good sign. Also in the table above is my discount cash flow analysis of Coke's valuation. Based on the historic (10-year) growth rate (assumed to be the slower of EPS and FCF) of 8%, this method of valuation suggests that Coke's common stock is undervalued.

Based on this valuation Coke's future earnings have a valuation of $46.09, which is about 20% above the current stock price of $38. In the past 10 years the dividend has more than quadrupled. The current dividend yield is 2.9%. There may not be much room for future dividend increases, because the current dividend payout ratio is about 57%.

In summary, it appears that Coca-Cola is fairly valued, but not a screaming buy. I prefer to buy investments in companies that appear at least 33% undervalued.

Disclosure: I own Coca-Cola (KO). This analysis is for informational purposes only and should not be considered a recommendation to buy, sell, or hold any equities. The information above is provided by and Yahoo Finance.

Stocks Discussed: KO, PEP,
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