Coke shares need no introduction. This high quality, good yielding issue has dipped with the market from a recent high of $59.45 to finish today at $54.14/share. EPS hit an all-time high in 2008 and are expected to have come in slightly higher for 2009 once Q4 earnings are released.
KO garners Value Line’s highest ratings for financial strength, safety, stock price stability and earnings predictability. They also have the approval of an obscure investor named Warren something or other.
Here are Coke’s historical per share numbers from continuing operations as reported by Value Line:
* 2009 data includes Q4 estimates
At today’s close of $54.14 KO shares trade for< 15.8x the 2010 consensus estimate of $3.43 making the present multiple near the lowest of the past 20 years. The dividend is now 3.03% based on last year’s payout.
A rebound to even a 17.5x multiple on forward estimates would bring KO shares back up to above $60 by year-end. That would be a 10.86% rise from here. Add in the yield and 13% - 14% seems like a conservative 12-month target.
Is that reasonable to expect? Value Line is using a 21 multiple for their 3 – 5 year projections. Standard and Poors now carries a 12-month goal of $65/share while assigning KO their highest, 5-star rating. Morningstar has a ‘consider selling’ price of $68.80/share.
KO shares hit peak prices of $64.30 - $65.60 in 2007 – 2008 and touched $59.45 pretty recently.
While Coke does not seem to have home-run potential it does seem a good bet to creep higher as its earnings and dividends grow over time. The longer the time period the surer you might feel that KO shares will be higher than today.
Under that scenario here’s a nice two-year play that could generate outstanding total return with a pretty low risk profile.
If Coke shares merely rise to $60 or better (+10.8% from today’s quote) by Jan. 20, 2012:
· The $60 calls will be exercised.
· You will sell your shares for $60,000.
· The $60 puts will expire worthless.
· You will have collected at least $3,280 in dividends.
· You will have no further option obligations.
· You will end up with no shares and $63,280 in cash.
That best-case scenario would result in a cash-on-cash profit of $23,440/$39,840 = + 58.8% achieved on shares that only needed to rise by< 11% over the next two years.
What’s the risk?
If coke shares fail to break above $60 by the Jan. 20, 2012 expiration date:
· The $60 calls will expire worthless.
· The $60 puts will be exercised.
· You will be forced to buy another 1000 KO shares.
· You will need to lay out an additional $60,000 in cash.
· You will have collected at least $3,280 in dividends.
· You will end up with 2000 shares and $3,280 in cash.
What’s the break-even on the whole trade?
On the original 1000 shares it’s the $54.14 purchase price less the $3.10 /share call premium = $51.04 /share.
On the ‘put’ shares it’s the $60 strike price less the $11.20 /share put premium = $48.80 /share.
Your overall break-even would be $49.92 (excluding dividends) and $46.64 (including the yield).
KO shares could fall by as much as (-13.8%) without causing a loss on this trade.
Summary:
Conservative, good-yielding KO shares look good for decent returns over the next couple of years with only a modicum of risk.
The buy/write combination seems likely to outperform the straight purchase of shares and provides a 13.8% margin of safety in case of unexpected market action.
Disclosure: Author is long KO shares and short KO options.
KO garners Value Line’s highest ratings for financial strength, safety, stock price stability and earnings predictability. They also have the approval of an obscure investor named Warren something or other.
Here are Coke’s historical per share numbers from continuing operations as reported by Value Line:
Year | Sales | C/F | EPS | Div. | B/V | Avg. P/E |
2002 | 7.92 | 1.99 | 1.65 | 0.80 | 4.78 | 30.2x |
2003 | 8.62 | 2.31 | 1.95 | 0.88 | 5.77 | 22.6x |
2004 | 9.12 | 2.45 | 2.06 | 1.00 | 6.61 | 22.6x |
2005 | 9.75 | 2.59 | 2.17 | 1.12 | 6.90 | 19.7x |
2006 | 10.39 | 2.81 | 2.37 | 1.24 | 7.30 | 18.5x |
2007 | 12.45 | 3.08 | 2.57 | 1.36 | 9.38 | 21.0x |
2008 | 13.82 | 3.58 | 3.02 | 1.52 | 8.85 | 17.8x |
2009* | 13.10 | 3.60 | 3.05 | 1.64 | 10.40 | 15.9x |
* 2009 data includes Q4 estimates
At today’s close of $54.14 KO shares trade for< 15.8x the 2010 consensus estimate of $3.43 making the present multiple near the lowest of the past 20 years. The dividend is now 3.03% based on last year’s payout.
A rebound to even a 17.5x multiple on forward estimates would bring KO shares back up to above $60 by year-end. That would be a 10.86% rise from here. Add in the yield and 13% - 14% seems like a conservative 12-month target.
Is that reasonable to expect? Value Line is using a 21 multiple for their 3 – 5 year projections. Standard and Poors now carries a 12-month goal of $65/share while assigning KO their highest, 5-star rating. Morningstar has a ‘consider selling’ price of $68.80/share.
KO shares hit peak prices of $64.30 - $65.60 in 2007 – 2008 and touched $59.45 pretty recently.
While Coke does not seem to have home-run potential it does seem a good bet to creep higher as its earnings and dividends grow over time. The longer the time period the surer you might feel that KO shares will be higher than today.
Under that scenario here’s a nice two-year play that could generate outstanding total return with a pretty low risk profile.
Cash Outlay | Cash Inflow | |
Buy 1000 KO @ $54.14 /share | $54,140 | |
Sell 10 Jan. 2012 $60 Calls @ $3.10 /share | $3,100 | |
Sell 10 Jan. 2012 $60 Puts @ $11.20 /share | $11,200 | |
Net Cash Out-of-Pocket | $39,840 |
If Coke shares merely rise to $60 or better (+10.8% from today’s quote) by Jan. 20, 2012:
· The $60 calls will be exercised.
· You will sell your shares for $60,000.
· The $60 puts will expire worthless.
· You will have collected at least $3,280 in dividends.
· You will have no further option obligations.
· You will end up with no shares and $63,280 in cash.
That best-case scenario would result in a cash-on-cash profit of $23,440/$39,840 = + 58.8% achieved on shares that only needed to rise by< 11% over the next two years.
What’s the risk?
If coke shares fail to break above $60 by the Jan. 20, 2012 expiration date:
· The $60 calls will expire worthless.
· The $60 puts will be exercised.
· You will be forced to buy another 1000 KO shares.
· You will need to lay out an additional $60,000 in cash.
· You will have collected at least $3,280 in dividends.
· You will end up with 2000 shares and $3,280 in cash.
What’s the break-even on the whole trade?
On the original 1000 shares it’s the $54.14 purchase price less the $3.10 /share call premium = $51.04 /share.
On the ‘put’ shares it’s the $60 strike price less the $11.20 /share put premium = $48.80 /share.
Your overall break-even would be $49.92 (excluding dividends) and $46.64 (including the yield).
KO shares could fall by as much as (-13.8%) without causing a loss on this trade.
Summary:
Conservative, good-yielding KO shares look good for decent returns over the next couple of years with only a modicum of risk.
The buy/write combination seems likely to outperform the straight purchase of shares and provides a 13.8% margin of safety in case of unexpected market action.
Disclosure: Author is long KO shares and short KO options.
