Is Coca-Cola’s Stock Split Pullback a Buying Opportunity?

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Whale watchers are well aware the largest holding in the Berkshire Hathaway (NYSE:BRKA) portfolio managed by investing titan Warren Buffet is Coca-Cola (NYSE:KO).  Over the years Buffet has amassed $15.7 billion dollars in KO shares, representing an 8.9% stake in the iconic blue chip.

For some investors, that is reason enough to gulp down some shares of Coke; but most mere mortals look for reasons to buy beyond Buffet likes it.

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.

In mid-summer 2012 Coca-Cola shares reached a 52-week high of about $77 a few days after announcing yet another solid earnings result in this company’s long and storied history.  However, following a pre-announced 2 for 1 stock split in mid-August, the share price has dropped around 4%.

With shares of Coke now trading at around $38 bucks, is KO a BUY, a WAIT and SEE, or a STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Stock splits sometimes act as catalysts for stock price movement but Coke’s most recent split has yet to make a substantial move one way or the other.  However, past history tells us this could be a chance for new investors to climb on board.  The last split was in 1996 and the share price after the split on May 13th of that year was $43.  The year-end closing price for KO was $52.63; an increase of more than 20%.

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, or 99.55% 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 $32.4 billion in debt with $16.97 total cash.  Dr. Pepper Snapple Group (NYSE:DPS) has a debt to equity ratio of 1.18 or 118% with $2.72 billion in debt and only $312 million total cash.  PepsiCo (NYSE:PEP) has a debt to equity ratio of 1.38 or 138% with $28.3 billion in debt with $4.19 billion 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 5, 2012, the stock price is 1.28% above its 20 Day Simple Moving Average; 0.14% above the 50 Day SMA; and 5.79% 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 12.61% and up 21.36% year over year, crossing above the 200 Day SMA in February and remaining above ever since.

S = Support is Provided by Institutional Investors & Company Insiders

Coca-Cola is 67.33% institutionally owned, which is actually a bit below the +70% mark of several other members of the DJIA (Dow Jones Industrial Average).  The top five holders are Berkshire Hathaway, Vanguard Group, Fidelity Investments, BlackRock Institutional Trust, and SunTrust Banks.

Of greater interest here is the 1.44% of 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 $0.62 showed significant improvement over the previous quarter’s $0.46 and beat the year over year EPS of $0.61.

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 25.8% while rival Dr. Pepper Snapple comes in slightly better at 25.91% and PepsiCo leads the trio with an ROE of 26.9%.

However, in an industry where operating margins are critical, Coke leads the pack with a margin of 23% compared to 17% for Dr. Pepper Snapple Group and 13.8% for PepsiCo.

Conclusion

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, 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 BUY for long term investors and at worst a WAIT and SEE for everyone else.

Coke is a branding story. The people at The Coca-Cola Company (NYSE: KO) are masters at building brand recognition.

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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