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Investors in Coca-Cola Co. (NYSE:KO) were let down Tuesday after the company released third-quarter earnings and revenue figures that failed to live up to analysts’ expectations. Quarterly revenue rose 1 percent to $12.34 billion, but analysts had been expecting $12.41 billion. The world’s largest soft drink maker, which does the majority of its business outside of the U.S., says that a stronger U.S. dollar and a consumer preference for lower-priced drinks in the Europe and Asia markets are to blame for the revenue shortcomings.
With shares of Coke now trading at around $38 bucks, is KO a BUY, a WAIT and SEE, or a STAY AWAY? (Skip to the end to see my conclusion.)
Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
Although European soda drinkers may have purchased a larger percentage of cheaper Coke products, total sales volume in Europe increased to help Coke realize 3.9 percent increases in third-quarter profit. The fact that sales are up in Europe — and up 4 percent worldwide — is a good sign that the struggling European economy might be headed in the right direction. Additionally, Coke experienced continued strong growth in its emerging markets like Thailand and India, where sales volume increased 19 percent and 15 percent, respectively. However, rising commodity costs must remain a concern going forward. They are expected to increase by $225 million from last year.
H = High Quality Pipeline
American corporate history is littered with the corpses and battered bodies of companies that simply failed to keep pace with the trends. Polaroid, F.W. Woolworths, and Sears all come to mind. Coke has a history of responding to changing tastes with additions to their product line; some through acquisition and some organically. From PowerAde to Coke Zero the company has not been content to rest on the strength of the more than 100 year old flagship product. Today, Coke has 15 “billion dollar” brands with over 500 global brands. Coke reaches consumers in a staggering 206 countries through about 3,500 brands. Latest efforts include increasing penetration in health related offerings.
E = Equity to Debt Ratio is Close to Zero
Coca-Cola’s debt to equity ratio of 0.99 looks bleak until you compare its numbers to its major competitors. We also need to consider total debt and total cash on hand, which for Coke is $32.48 billion in debt with $16.97 in total cash. Dr. Pepper Snapple Group (NYSE:DPS) has a debt to equity ratio of 1.18 with $2.72 billion in debt and only $312 million in total cash. PepsiCo (NYSE:PEP) has a debt to equity ratio of 1.375 with $28.3 billion in debt and $4.19 billion in total cash.
A = A-Level Management Runs the Company
A hallmark of A level management is the willingness to restructure to meet demand. Coke CEO Muhtar Kent has listened to concerns from the company’s regional leadership about excessive bureaucracy. Right now Coke is working to streamline reporting lines to maximize efficiency. Coca-Cola has three operating segments – Coca-Cola International; Coca-Cola Americas; and the Bottling Investment Group. In a bold move, it appears they are going to push leadership for global operations into the Bottling group. The shake-up in the making should impact KO’s bottom line going forward.
T = Technicals on the Stock Chart are Strong
As of October 16, 2012, the stock price is 1.59% below its 20 Day Simple Moving Average; 1.72% below the 50 Day SMA; and 2.82% above the 200 Day SMA. Since the beginning of 2012 the stock price has been in an upward trend with some dips along the way and is up 11.30% YTD and up 15.62% year over year.
S = Support is Provided by Institutional Investors & Company Insiders
Coca-Cola is 63.22% institutionally owned, which is actually a bit below the +70% mark of several other members of the DJIA (Dow Jones Industrial Average). Top holders are Berkshire Hathaway, Vanguard Group, Fidelity Investments, BlackRock Institutional Trust, and SunTrust Banks.
Of greater interest here is the insider transactions. Forbes and others recently noted the April 27th 2012 large purchase of 264,000 shares by KO board member Barry Diller, who paid $38.49 per share, split adjusted for a total purchase price of about $20.3 million. The share price closed on September 24th at $38.12.
E = Earnings Are Increasing Quarter over Quarter
Coke’s earnings have bounced a bit over the last five quarters but the most recent quarterly number of $0.50 showed significant decline from the previous quarter’s $0.67 and just beat the year over year EPS of $0.48.
E = Excellent Relative Performance to Peers
Many investors favor Return on Equity as a key metric and on this indicator Coca-Cola’s performance is in line with peer company comparisons. KO has an ROE of 25.86% while rival Dr. Pepper Snapple comes in slightly better at 25.91% and PepsiCo leads the trio with an ROE of 26.98%.
However, in an industry where operating margins are critical, Coke leads the pack with a margin of 22.33% compared to 17.14% for Dr. Pepper Snapple Group and 13.89% for PepsiCo.
More and more investing experts are pointing to American companies with global exposure as the place to be. If you buy that advice, it is hard to imagine a company better positioned than Coca-Cola, with a diversified product line and exposure to more than 200 countries around the world. Coke has reigned supreme in Interbrand’s annual ranking of the world’s most valuable brands since they began producing the list in 2001. To put their brand strength in perspective, Interbrand says the Coke band is more valuable than McDonald’s and Disney combined.
Some experts scoff at the notion that investors could be lured by an artificially lowered share price like Coke’s newly split adjusted shares; but, that opinion flies in the face of investor psychology. It is simple common sense that retail investors generally feel better about buying more shares of a company at a lower price. The rational mind says that 50 shares at the old price of around $76 cost the same as 100 shares at the current price of $38, but who says markets and those who invest in them are totally rational?
Coke is a WAIT and SEE after earnings slightly disappointed. The stock has had quite a run and will likely see profit takers before gaining the steam to continue rallying. Moreover, as Central Banks continue quantitative easing, commodity costs will rise and squeeze Coke’s margins.
Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.
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