Valuation: Coca-Cola Company (KO)

Company Profile: Coca-Cola Company (KO) (obtained via Google Finance) The Coca-Cola Company, incorporated in September 1919, manufactures, distributes and markets non-alcoholic beverage concentrates and syrups. It manufactures beverage concentrates and syrups, which it sells to bottling and canning operations, fountain wholesalers and some fountain retailers, as well as some finished beverages, which it sells primarily to distributors. The Company owns or licenses more than 400 brands, including diet and light beverages, waters, juice and juice drinks, teas, coffees, and energy and sports drinks. It also has ownership interests in numerous bottling and canning operations. Finished beverage products bearing the Company’s trademarks are sold in more than 200 countries. As of December 31, 2006, the Company operated through eight segments: Africa; East, South Asia and Pacific Rim; European Union; Latin America; North America; North Asia, Eurasia and Middle East; Bottling Investments, and Corporate. In June 2007, the Company completed the acquisition of Energy Brands, Inc., known as glaceau, and its range of water brands, including vitamin water. glaceau will operate as a separate business unit of Coca-Cola North America.

Business and Management Review
1) Is the business simple and understandable?
Coke is a staple American product and has held this position for nearly a century. The business model is extremely simple as they manufacture and distribute non-alcoholic beverages under the Coke brand as well over 200 other brands.

2) Does the business have a consistent operating history?
Coke has had a long and favorable operating history for nearly a century.

3) Does the business have favorable long term prospects?
With the major two soda manufacturers (Coke and Pepsi) holding onto a firm market position we feel that Coke will continue to be a major player in this market for the foreseeable future (seriously who doesn’t love Coke?). And with the emerging new brands that management has unveiled (ie: Vitamin Water) we feel the company will continue to enjoy the success of their past.

4) Is management rational?
We are confident in the management of Coke and have no reason to question their actions.

5) Is management candid with its shareholders?
Investor relations appear to be strong as they easily and accurately present relevant information for the shareholders.

6) Does management resist the institutional imperative?
We have no doubt that management does resist this imperative.

Financial and Value Review

Defensive:
1) Size of firm
Having a market capitalization greater than $2 billion Coke passes this test.

2) Strong financial condition
With a weighted current ratio of roughly 1 Coke falls below the required 2, therefore they fail this test.

3) Earnings stability
There has been positive net income for the past ten years and they pass this test.

4) Dividend record
The firm has paid a dividend for the past ten years therefore they pass this test.

5) Earnings growth
EPS have increased by 1/3 over the past ten years. Pass.

6) Price to earnings analysis
With a P/E of about 31(using our Methods) Coke is above the requirement of 20. Fail.

7) Price to assets analysis
The P/B for Coke is roughly 9 and is above the required 2.5. Fail. The P/B * P/E ratio is above the required 50. Fail.

Overall
Scoring 4/8 we would not suggest Coke being placed in the defensive investor’s portfolio at this time.

Enterprising:
1) Strong financial condition
Current ratio is below the required 1.5. Fail. The debt to net current assets ratio is above the required 1.1. Fail.

2) Earnings stability
There has been positive net income for the past five years. Pass.

3) Dividend record
The firm currently pays a dividend. Pass.

4) Earnings growth
Earnings are greater than five years ago. Pass.

5) Price
The current share price is greater than 150% of the company’s net tangible assets. Fail.

Overall
Scoring 3/6 Coke fails the test for the enterprising investor and should not be placed in their portfolio at this time.

Valuation:
Our analysis concludes a per share valuation of roughly $40.

Opinion:
Seeing that currently Coke is trading at a much higher price than our internal valuation we would be skeptical to purchase this security at this time. However, Coke is an excellent firm with great management, products, dividend history, and earnings. This stock we would place on our review list and periodically watch the share price to see if it dips and falls more in line with what we would be comfortable paying.

None of the staff of ModernGraham.com held a position in Coke at the time of publication. Also, please read our disclaimer and Our Methods.


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