Company ProfileÂ (obtained fromÂ Google Finance):Â The Coca-Cola Company, incorporated on September 5, 1919, is a beverage company. The Company 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. It owns and markets a range of nonalcoholic sparkling beverage brands, which includes Coca-Cola, Diet Coke, Fanta and Sprite. The Companyâ€™s segments include Eurasia and Africa, Europe, Latin America, North America, Pacific, Bottling Investments and Corporate. In September 2012, it acquired approximately 50% equity in Aujan Industriesâ€™ beverage business. In January 2013, Sacramento Coca-Cola Bottling Company announced that it had been acquired by the Company. Effective February 22, 2013, Coca-Cola Co acquired interest in Fresh Trading Ltd. Effective February 22, 2013, Coca-Cola Co acquired interest in Fresh Trading Ltd.
Defensive and Enterprising Investor TestsÂ (What is the significance of these tests, and what is PEmg ratio?):
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation SummaryÂ (explanation of the ModernGraham valuation model):
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$28.91|
|Value Based on 0% Growth||$16.95|
|Market Implied Growth Rate||5.68%|
Balance Sheet – 7/27/2013 (anÂ Introduction to the Balance Sheet)
Earnings Per Share – Diluted
Earnings Per Share – Modern Graham
Coca-Cola may be suitable for an enterprising investor, but is not suitable for a defensive investor following Benjamin Graham’s requirements fromÂ The Intelligent Investor. Â The company’s current ratio is not strong enough for either investor, and though the enterprising investor may be willing to overlook this fact because of other factors, the defensive investor should not be willing to do so because the price to book ratio is also considerably higher than what the defensive investor requires. Â From a valuation standpoint, Coca-Cola seems to be fairly valued based on ModernGraham’s updated version of Benjamin Graham’s model.
What do you think? Â Is Coca-Cola fairly valued by the market place or will it see a higher growth rate than what is implied?
Disclaimer: Â The author did not hold a position in Coca-Cola at the time of publication, and had no intention of purchasing a stake in the next 72 hours.
Photo Credit: Â Andrew Magill