Joel Greenblatt (Trades, Portfolio) is the founder and managing partner of Gotham Asset Management, LLC. He is known for the invention of Magic Formula Investing. He is the author of two investment books, including Joel Greenblatt: The Little Book that Beats the Market. He is also an Adjunct Professor with Columbia Business School.
Greenblatt tries to find cheap and good companies. He looks for value with a catalyst. Greenblatt likes special situations, and thinks that they are simply different places to find cheap stocks. In his own hedge fund, Greenblatt uses the basic principals in the Magic Formula: Look for high ROC and high earnings yield. He tries to figure out what "normalized earnings" will be 3-4 years into the future. Greenblatt makes sure the stock is very cheap based on normalized earnings.
Last quarter, he significantly increased his holdings in Coca-Cola (KO, Financial) by buying 1,106,462 shares. As of March 31, 2015, he was holding 1,136,418 shares of the company. The following chart shows his holding history in the company.
Coca-Cola is the world's largest beverage company. It owns or licenses and markets more than 500 nonalcoholic beverage brands, primarily sparkling beverages but also a variety of still beverages such as waters, enhanced waters, juices and juice drinks, ready-to-drink teas and coffees, and energy and sports drinks. The company owns and markets four of the world's top five nonalcoholic sparkling beverage brands: Coca-Cola, Diet Coke, Fanta and Sprite. Finished beverage products bearing its trademarks are sold in more than 200 countries.
Coca-Cola makes its branded beverage products available to consumers throughout the world through its network of company-owned or -controlled bottling and distribution operations as well as independent bottling partners, distributors, wholesalers and retailers — the world's largest beverage distribution system. Beverages bearing trademarks owned by or licensed to the company account for 1.9 billion of the approximately 57 billion servings of all beverages consumed worldwide every day. The company's operating structure includes six operating segments: Eurasia and Africa, Europe, Latin America, North America, Asia Pacific, Bottling Investments and Corporate.
Coca-cola posted net sales of $46.01 billion in 2014 while its adjusted EPS stood at $2.04. According to consensus expectations, the company’s EPS is expected to decline 2% in the current year and grow 7% next year. Its topline is also expected to decline 2.60% in the current year and grow 2.50% next year. The company is facing headwinds from adverse foreign currency movements in the current year. More than half of Coca-Cola’s revenues come from outside the US and the recent strengthening of the USD against other currencies is a negative for the company.
However, I believe investors should look beyond this near term headwind. The company is taking several steps to transform the business, to accelerate growth and also to regain its momentum. These include, streamlining and simplifying the company’s operations; cutting costs to free-up capital and resources to reinvest in its business as well as provide the company more financial flexibility. The company intends to cut $3 billion in cost by 2019 and invest these savings in marketing efforts to drive its topline and gain market share.
Analysts seem to be bullish on the company’s plans. Out of 25 analysts covering the company, 13 have buy ratings, 10 have hold ratings and only two have underperform ratings. In his research report sent to the clients, Wells Fargo’s analyst Bonnie Herzog wrote,
We hosted investor meetings with Coca-Cola’s management team over the past of couple days in NYC and came away incrementally more positive on Coca-Cola’s ability to drive accelerated top-line growth as it continues to step-up marketing spend and fully fund brands globally. In attendance were Kathy Waller, CFO; Tim Leveridge, Investor Relations Officer; and LaSonja Scott, Investor Relations Director. Other key takeaways include: (1) Bulk of productivity/cost savings opportunities to be reinvested to drive growth with some incremental upside potential to its $3B target; (2) Increased media spend could boost top-line growth; (3) Price/pack architecture working to drive pricing power; and (4) Monster Beverage(MNST)/Keurig Green Mountain (GMCR) equity stakes provide another avenue for growth and we think plant based beverages could be next. Bottom line – Despite the challenging macro environment, we are encouraged by Coca-Cola’s ability to drive incremental share gains and net price realization through its increased media spend and best-in-class price/pack architecture. We reiterate our Outperform rating and $46-48 valuation range.
Coca-Cola is trading at 19.49 times forward earnings and has a forward dividend yield of 3.20%. I believe the stock is a good buy given the transformative steps which are likely to drive the company’s topline growth in the medium term.
