One of beverage superpower Coca-Cola Co.'s (KO, Financial) directors, Herbert A. Allen III, recently plunked down nearly $2 million dollars to buy 33,200 shares on Oct. 28 at a price of approximately $60.18 per share, according to GuruFocus insider trade data.
Allen is a member of the board of directors at Coca-Cola who was appointed in December 2021. In the past, Allen was the president of Allen & Co., a privately held investment firm, for nearly two decades, so as a fellow investor, I believe he may be even more savvy than most insiders. Thus, let's take a look at Coca-Cola to see whether this insider is making a good call picking up shares of the company at the moment.
About the company
Coca-Cola is a multinational beverage company founded back in 1886 with products sold in more than 200 countries and territories. In fact, it is the biggest beverage company is the world. Its product portfolio of carbonated soft drink brands includes Coca-Cola, Sprite and Fanta. It also owns non-carbonated hydration, sports drinks, juice, coffee and tea brands, including Dasani, Smartwater, Powerade and Gold Peak. It also has licensing partnerships with some alcoholic brewers.
Coca-Cola has a franchisor - franchisee business model wherein it owns the brand names and does all the brand building, product development and marketing and supplies the concentrate and flavours to its bottlers while the bottlers do the heavy lifting of manufacturing and distribution. Coca-Cola collects royalty payments, which are an undisclosed percentage of revenue from the bottlers. This makes for an asset light business as all the large capital investments in the bottling plants, inventory and transportation infrastructures are handled by the bottlers.
Source: Coca-Cola investor relations
Excellent quarterly results
The company's most recent quarterly report for the third quarter of 2022 saw global unit case volume grow 4%, translating to revenue growth of 10% and operating income growth of 7%. On a comparable currency neutral basis, operating income grew 18%, showing that the strong dollar was a huge blow to international sales. The operating margin shrunk to 27.9% vs. 28.9% a year ago. Earnings per share grew 14% to $0.65 on a GAAP basis and 7% to $0.69 on a non-GAAP basis.
Looking at the long-term revenue and net income chart below, we can see that Coca-Cola is reviving after a period of weakness. This is a mature company in a slow growth industry, even though it is highly profitable.
Financial strength
While GuruFocus gives a middling 5 out of 10 score for the company's financial strength, in my opinion this is understated given the company's enormous and reliable cash flow. The company maintains an A+ bond rating in spite of its $35.5 billion long-term debt. The company's operating cash flow are depicted in the diagram below. Core free cash flow is around $9.7 billion. This huge and consistent cash flow gives the company better debt repayment certainty.
Shareholder focus
Coca-Cola is an extremely shareholder-friendly company, sharing its wealth via both dividends and buybacks. The following diagram depicts the cumulative shareholder returns Coca-Cola has delivered to shareholders since 2006. The top green line show the market capitalization of the company, which has risen consistently at over a 6% CAGR. The purple area of the chart is the cumulative dividends paid out to common shareholders, the red area is the treasury shares the company has purchased (via stock buybacks) and the blue area is the money the company has retained. Adding cumulative dividends, stock buybacks and retained earnings gives us a good estimate of fundamental performance. Both dividends and buybacks are important part of Coca-Cola's total shareholder returns. Long-term fundamental returns using this method are consistently in the 7% CAGR range and this should continue into the future as Coca-Cola continues to penetrate deeper into growing emerging markets.
Valuation
The GF Value chart shows Coca-Cola to be fairly valued. The GF Value is an intrinsic value estimate from GuruFocus that uses the stock's historical price multiples, past returns and estimates of future business performance.
The company's price-earnings ratio and forward price-earnings ratio are 25.88 and 23.42, respectively, which implies a 9.5% growth rate in earnings per share in the current year. The Shiller price-earnings ratio is 30.23, which implies a current discount of 16.8%.
The dividend yield is 2.97%. Coca-Cola has grown the dividend consistently in the past (at a CAGR of 6.1% over 10 years).
Conclusion
Beverage superpower Coca-Cola has performed much better than the S&P 500 so far in the bear market which started early this year, as shown in the chart below. The company is considered recession-resistant by many as the demand for its products is not significantly impacted by an economic downturn.
Coca-Cola’s third-quarter results and guidance reflect the company’s reliable cash flows, pricing power and the resilience of its business model. Moreover, the company’s consistent and growing dividends make it a kind of "bond alternative" and thus make it worth a premium price-earnings ratio in my opinion. If the bear market gets worse, I believe investors will be very happy with the lifeboat called Coca-Cola. Overall, I think the stock is between fairly valued to somewhat undervalued at the moment given the quality of the franchise.
