CEO Muhtar Kent said Coca-Cola "plans to invest more than $25 billion over the next five years to help reach its $200 billion sales target in 2020" (the first mention of results for its 2020 vision). Turkey is considered among the “tigers” of growth markets for the company, which also include Brazil, Russia, India and China, Kent said. Average annual per capita consumption of Coca-Cola products in developed countries, with a combined population of about 1 billion, is perhaps 100 versus countries with the greatest populations, around 5 billion, having annual per capita consumption of 10-20 or even less. By way of comparison, leading countries have annual per capita consumption over 300. Coca-Cola's challenge to reach goals of "Vision 2020" is to increase low consumption figures in countries with huge populations.
KO's growth phase is shifting to a new stage that could create a new 80-90 price layer in the shares. KO growth story had three different growth stages. The first phase began under Chairman Isdell in 2004. It was about elevating the talent pool, marketing capability and the rate of brand investments. The firm also began to take in broken bottlers, as a buyer of last resort. The second phase, led by Muhtar Kent, started in 2006. It was about repairing the broken trust of bottlers worldwide. Mr. Kent’s team fostered behaviors necessary to grow the system profit pie, de-emphasizing Coke’s redistribution of system wealth instincts. Key bottling partners responded to clarity of roles and economic splits by stepping up investments in execution and in the brands. System cash flow surged. Now a third phase of system evolution seems upon us as Coke’s improved partnership model is producing willing buyers for broken bottlers at the Bottling Investment Group, “BIG.” Returning Coke to a capital-light model should elevate Coke’s ROIC and stoke Coke’s earnings growth.
As we can see in the chart, Coca-Cola's ROI has declined 30% over the last 10 years, primarily owing to its high level of investment over this period. Basically, KO is looking to untie its own capital in fixed assets or broken bottlers. In fact, the longer Coke ties up its own capital for low-return activities, the longer it will be unable to step up investments in brands, marketing and innovation to its full potential in these markets.
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I think that there are two catalysts that could drive value for shareholders over the medium term and increase ROI to historic levels (30%). The first one is refranchising the U.S and the second is increasing returns and monetizing the company owned bottlers (“BIG”). KO shares have been penalized for the number of asset-intensive bottlers that it currently has on the books. If the company has an opportunity to take its ROIC up toward 30% or higher again over the next couple of years as a result of these asset sales and improved performance, I believe that a target value of $90 could be achievable.
Today, Coke is pushing internally to double the business by 2020 and it is getting better alignment from its bottlers. As the cash-rich and underleveraged global bottling network makes extraordinary investments behind the brands in an unprecedented manner, as Coke’s marketing culture advances and as Coke does a better job running company owned-bottlers, I think that the time is ripe for a sustained multiple gap to widen again toward historical levels.
From my Bloomberg screen I get that the current price of $68 is 5% undervalued from a Dividend Discount Model Valuation perspective (check the chart), but I get a target $100 valuation from DCF model by assuming that KO's success in improving their Cash Flows and ROI in the future. I am a buyer of KO shares at these levels and expect the stock to continue its uptrend.
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