A couple weeks ago I started a position for this portfolio in Coca-Cola (KO). I've owned them for many years but the pricing and valuation wasn't quite there. When the yield hit 3% I struck and made a purchase. They have recently released their Q3 earnings and it was a good time to review them. Here is an explanation of my process..
Fast graphs review
Its important to look at a company's historic price movements only to itself. Why? As we see here KO almost never gets below its fair value. Its Coca Cola it is too big of a name and to stellar a stock record. Instead of comparing share price to its fair value here I will use P/E as a measure of what is under and overpriced. We can see that right now its historically cheap and bottoming out. That bottoming is what I had been waiting over a year for. Is it THE bottom? Who knows. All I know is that it is historically cheaper then it usually is.
In 2010 we see a high spike in its EPS. This was due to a new multi-year bottling contract with Dr Pepper (DPS). They took the entire earnings at once instead of amortizing it over several years. For this reason, I ignore that spike in EPS and fair value.
The graph overall is exactly what I want to see: growing dividend and a growing EPS to pay for it.
Interesting to see that my calculations differing from Fastgraphs. They show it historically under its P/E range. Here its 20 P/E is above its 10 year average of 19.46 signaling that its overpriced. I would not say one is wrong they are looking at P/E differently. I used diluted earnings with fastgraphs.
The dividend growth rate has maintained a 10 year average of 8%. That is my target goal, roughly double inflation. What I am also happy with is that the EPS growth is more than the dividend growth rate. This will give management padding to continue raises in the future should their EPS growth slow.
Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial advisor, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.
COCA COLA (KO)
Last Updated: Q3-2013
Description: 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 Company’s segments include Eurasia and Africa, Europe, Latin America, North America, Pacific, Bottling Investments and Corporate.
How do they make money: KO makes money two primary ways.
1: Selling concentrated syrups to bottlers. The bottlers, sometimes different companies, makes and sells carbonated beverages.
2: Selling non-alcoholic ready to drink beverages to consumers.
Key Brands: Coca-Cola, Diet Coke, Sprite, Dasani, Fanta, Minute Maid, Vitawater, Powerade, Simply Juice
Company Organization
Coca Cola Americas
North America
Latin America
Coca Cola International
Europe
Eurasia and Africa
Pacific Group
Plans and Strategy
Grow the company across multiple types of beverages
2020 Vision
Reduce Carbon footprint 15% of 2007 numbers
Recycle equivalent of 100% of packaging.
Water neutral impact on environment (2012 35% water replacement)
Management doesn’t think share buybacks are value enhancing for long term investors. (Q3-2013)
I strongly disagree with that. The power of share buybacks compounds for a longer time then a dividend payment. I like it best when both are done.
I strongly disagree with that. The power of share buybacks compounds for a longer time then a dividend payment. I like it best when both are done.
Risks
Obesity and health concerns over High Fructose Corn Syrup: The U.S. is focusing more on healthy alternatives to carbonated chemical sodas. Governments and locations are talking about sugary drinks.
Mitigation: KO offers diet soda, juices, waters, sports drinks. They have a full diversification of products.
Competitors
Competitors
Dr Pepper Snapple (DPS)
Monster Beverage (MNST)
Pepsi (PEP)
Company Fundamentals
Its important to look at a company's historic price movements only to itself. Why? As we see here KO almost never gets below its fair value. Its Coca Cola it is too big of a name and to stellar a stock record. Instead of comparing share price to its fair value here I will use P/E as a measure of what is under and overpriced. We can see that right now its historically cheap and bottoming out. That bottoming is what I had been waiting over a year for. Is it THE bottom? Who knows. All I know is that it is historically cheaper then it usually is.
In 2010 we see a high spike in its EPS. This was due to a new multi-year bottling contract with Dr Pepper (DPS). They took the entire earnings at once instead of amortizing it over several years. For this reason, I ignore that spike in EPS and fair value.
The graph overall is exactly what I want to see: growing dividend and a growing EPS to pay for it.
Company Stats
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013e
|
5y Avg
|
10y Avg
|
Share Price
|
$20.82
|
$20.16
|
$24.13
|
$30.69
|
$22.64
|
$28.50
|
$32.89
|
$34.16
|
$36.25
|
$42.27
|
$34.81
|
$29.25
|
EPS
|
1
|
1.02
|
1.08
|
1.28
|
1.25
|
1.47
|
2.53
|
1.84
|
1.97
|
2.09
|
1.98
|
1.553
|
EPS Growth
|
-
|
2.00%
|
5.88%
|
18.52%
|
-2.34%
|
17.60%
|
72.11%
|
-27.27%
|
7.07%
|
6.09%
|
15.12%
|
11.07%
|
P/E
|
20.82
|
19.76
|
22.34
|
23.98
|
18.11
|
19.39
|
13.00
|
18.57
|
18.40
|
20.22
|
17.92
|
19.46
|
P/B
|
6.3
|
5.9
|
6.7
|
6.5
|
5.1
|
5.3
|
4.9
|
5
|
4.9
|
5.3
|
5.08
|
5.59
|
Interesting to see that my calculations differing from Fastgraphs. They show it historically under its P/E range. Here its 20 P/E is above its 10 year average of 19.46 signaling that its overpriced. I would not say one is wrong they are looking at P/E differently. I used diluted earnings with fastgraphs.
Dividend Stats
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013e
|
5y Avg
|
10y Avg
|
Dividend
|
$0.5
|
$0.56
|
$0.62
|
$0.68
|
$0.76
|
$0.82
|
$0.88
|
$0.94
|
$1.02
|
$1.12
|
$0.96
|
$0.79
|
Dividend Yield
|
2.40%
|
2.78%
|
2.57%
|
2.22%
|
3.36%
|
2.88%
|
2.68%
|
2.75%
|
2.81%
|
2.65%
|
2.75%
|
2.71%
|
Share buyback %
|
1.36%
|
1.50%
|
1.83%
|
0.82%
|
-0.20%
|
0.30%
|
-0.17%
|
0.43%
|
1.35%
|
0.48%
|
0.80%
| |
Div Growth
|
-
|
12.00%
|
10.71%
|
9.68%
|
11.76%
|
7.89%
|
7.32%
|
6.82%
|
8.51%
|
9.80%
|
8.07%
|
9.39%
|
EPS Payout Ratio
|
50.00%
|
54.90%
|
57.41%
|
53.13%
|
60.80%
|
55.78%
|
34.78%
|
51.09%
|
51.78%
|
53.59%
|
49.40%
|
52.33%
|
The dividend growth rate has maintained a 10 year average of 8%. That is my target goal, roughly double inflation. What I am also happy with is that the EPS growth is more than the dividend growth rate. This will give management padding to continue raises in the future should their EPS growth slow.
Earning Report Notes
Q3-2013
EPS: +4%
Global volume: +2% (25th consecutive quarter of growth)
Operating income: +8%
North America: +2% volume, 0% sparkling, +5% still beverage. Teens prefer Coca-Cola 2:1 (big future market share). Coke x2 vs Diet Coke.
Latin America: +5% volume. Mexico and Brazil slowdown.
Europe: -1% volume. +3% North Europe countries vs -5% South Europe.
Eurasia and Africa: +4% volume.
Pacific: +5% volume. +9% China made up for slow H1 2013 results and changed strategies and it paid off. Believes slowdown in China is over and recovering is starting. +6% India (+22% Coca Cola in India)
Bottling transactions, including deconsolidation of Brazil bottling, -3% 2013 year revenue.
Last quarter saw flight of currency from emerging markets back to north america.
Still a growth story: “1 billion new middle class still holds very strong in our opinion by 2020”. That will be 1 billion more people with disposable income.
Q2-2013
EPS: +4%
Global volume +1% Q/Q, +3% YTD
Currency neutral net revenue: +1%
North America: -1% volume, -4% sparkling beverages, +5% still beverages
Latin America: +2% volume
Europe: -4% volume
Eurasia and Africa: +9% volume
Pacific: +2% volume. Thailand, Indonesia, Vietnam all double digit.
Company and Industry specific commonly used acronyms and terms
Price Mix: The value or price of an item that is determined by the individual producer. i.e. MSRP.
Resources
Company Website: http://www.coca-colacompany.com/
Investor Relations: http://www.coca-colacompany.com/investors/
Morningstar: http://quotes.morningstar.com/stock/s?t=ko
Transcripts: http://seekingalpha.com/symbol/ko
Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial advisor, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.
Nice writeup!
ReplyDeleteGood company to own.. People will be drinking COKE or its other products for year to come.
ReplyDeleteWell written post.