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| Date: Monday 01st 2008f December 2008 03:51:33 PM |
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What Can Ignite Coke - 02/08/2006 |
| By: Novice Investing Staff |
| Coca Cola Co. (KO), a dow component, is not an exciting stocks to invest anymore. Look at the 5 year chart and you see that Coke moves in a $ 40 - $ 55 range. It is near the bottom of the range lately, at $ 41 per share. Not even a solid earning expectation moves the stock. On Tuesday, Coke reported 46 cents earning per share for the 4th quarter of 2005 excluding items, 1 cents ahead of expectation. Coke stock was so excited that it gains an additional 9 cents, a 0.22% increase for the day. | |
| Overall, the report is a slight positive for Coke. Sales for the quarter rose 7% to $ 5.55 Billion, $ 155 Million larger than expected. Gallon sales rose 4 %, which indicates that people drink more of Coke's products during the quarter. The breakdown is as follows: 4% increase in unit-case volumes in China, Russia, Brazil and Turkey. 3% increase in North America, which is a crucial market to be in. And finally, a whopping 17% increase in North Asia, Eurasia and middle East. For the full year, Coca Cola sales rose 5.2% to $ 23.10 Billion. For the year, earning clocks in at $ 5.10 Billion excluding items or $ 2.14 per share. | |
| That being said, it is interesting to ask the question on why the earning beat fails to move Coke's stock. Is it over for Coke? This company is identical to branding during its lifetime. It invented the soft drink industry with dominating presence everywhere around the world, only to be rivaled by PepsiCo Inc. (PEP) in recent years. | |
| We believe so. We do not mean that Coke will go bankrupt a la Enron or other failed enterprises. However, let's think about this and use the cold hard fact to calculate the fair value of Coke. It earned $ 2.14 per share in 2005. In the latest quarter, it had a positive net cash of $ 10.8 Billion or $ 4.53 per share. Positive net cash is the sum of a company's cash, short term investment and long term investment subtracted by its long-term debt. This is one of the way to value stronger company higher due to the strength of its balance sheet. | |
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All right, it looks like analysts expect Coke to grow earning 8% annually for the foreseeable future. What is it worth in 5 years? Well, in 5 years, Coke will be earning $ 3.14 per share. The present value of this earning at 4% inflation rate is $ 2.58 per share. Since bond yield pretty much doesn't move, our fair value is when a stock has a forward price earning ratio of 13.4. At this point, a stock will yield 7.46%, better than a 10 year treasury yield. |
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What is the fair value of Coke's business using an 8% growth in earning? It is (13.4 x $ 2.58) = $ 34.57 per share. Adding back the cash on its balance sheet, the fair value of the Coke stock is therefore $ 39.1 per share. |
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Every year, a magazine will list the most valuable brand in the world and Coke always comes up on top. For 2005, Coke's brand value is in the neighborhood of $ 65 Billion. Should we add this brand value to our fair value calculation? The answer is no. The reason is that even though Coke's brand is 'perceived' to be valuable, it has failed to take advantage of this by producing profit. Our profit equation shows that Coke only deserves a value of $ 39.1 per share and not more, despite its enormous brand value. |
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So, what can Coke do to increase its shareholder value? It seems like it can only grow 5% internally. Therefore, one of the solution is to find a merger partner and find synergies between the two companies. This is akin to PepsiCo's Frito Lay's division where it is not a soft drink company. Both divisions now help PepsiCo to grow earning and recently, PepsiCo has a market capitalization close to Coca Cola Co. |
| END |
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| Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Coca Cola Co. (KO) or any other securities. |
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