Coca Cola (KO) is a compelling long-term investment opportunity that provides steady dividend yields and growth. The company continues to expand into overseas markets, and share buybacks keeps shareholders rewarded. The investment offers reasonable protection and has generous yields. The low-risk along with the reasonable yields should pique income oriented investors.
Coca Cola's profitability has declined in recent years. Despite the recent decline in profitability, the company has been able to increase its revenue growth and generates higher profit margins than Doctor Pepper (DPS) and Pepsi (PEP). Doctor Pepper Snapple has a profit margin of 10.49% and Pepsi has a profit margin of 9.42%. Coca Cola has a profit margin of 18.78%, the highest of its peer group, implying that company's management has done a much better job of managing its profitability when compared to its nearest competitors.
Generally, Coca Cola's profitability is between the 18-22% range. Over the past ten years, the company has been able to sustain higher profitability when compared to its peers. Coca Cola's higher profitability does not sacrifice the company's ability to grow revenues. In fact, revenues have grown significantly over the past ten years. I don't believe the declining profitability should be a serious concern to investors as Coca Cola's food products have an elasticity rating of 0.12. Meaning that a 10% increase in the price of its products would only reduce demand by 1.2%. The company could charge higher prices in order to avoid margin erosion.
Between 2003 and 2012, Coca Cola has been able to increase its revenues by 130%. The company's profitability has remained fairly stable throughout the same period. Coca Cola's management has been able to sustain the growth of the business without damaging profits. Coca Cola has been able to sustain its growth through expansion into overseas markets.
Coca Cola has been able to sustain growth by investing and developing its brand in overseas markets. Eurasia & Africa is its fastest growing division, generating 11% year-over-year revenue growth. Following that, Latin America is its second fastest growing division at 5%. Investors should anticipate stable revenue growth due to the success of its product expansion efforts in foreign markets.
I anticipate the European economies to recover. Eurozone economies are expected to grow gross domestic product between 2013 and 2014.
According to Schlumberger, the worldwide GDP is projected to grow at 3.5% for 2013, and 3.9% for 2014. This implies that Coca Cola's economic environment is both stable and will continue to improve going forward. It is also anticipated that the eurozone will exit out of recession by the end of 2014 barring any unforeseen circumstances. This could be an unanticipated catalyst for earnings in the upcoming quarterly reports.
The company has been able to increase its stock buy back program over the past 3-years. The management team has been exceptionally good about returning cash to shareholders. The share buy backs inflates the earnings per share.
Coca Cola remains a compelling investment opportunity as the business has been able to generate revenue growth while maintaining profitability. The business has increased its stock buyback program (returning cash to shareholders) while offering a 2.77% dividend yield. This is a excellent investment for income oriented investors who have a long-term investment horizon.
The stock is in a multi-year up-trend as it continues to move in a range bound pattern between the two diagonal trend lines. The favorable fundamentals further support the stock move, implying that the stock is likely to trend higher, over the long-term.
Source: Chart from freestockcharts.com
The stock is trading above the 20-, 50-, and 200- Day Moving Averages. The stock could be due for a minor pull-back, but remains in a multi-year up-trend.
Notable support is $35.00, $36.00, and $39.50 per share. Notable resistance is $42.70, $44.50, and $47.50 per share.
Analysts on a consensus basis have reasonable expectations for the company going forward.
Past 5 Years (per annum)
Next 5 Years (per annum)
Price/Earnings (avg. for comparison categories)
PEG Ratio (avg. for comparison categories)
Source: Table and data from Yahoo Finance
Analysts have reasonable expectations as analysts on a consensus basis have a 5-year average growth rate forecast of 8.95% (based on the above table). This growth rate is below the industry average for next 5-years (13.15%).
Source: Table and data from Yahoo Finance
The average surprise percentage is 1.4% above analyst forecast earnings over the past four quarters (based on the above table).
Forecast and History
Source: Data from YCharts
The EPS figure shows that throughout, the 2003-2010 period the company earnings have increased. The EPS figure in 2010 was inflated due to currency fluctuations that increased the market value of Coca Cola's foreign subsidiaries. Excluding 2010, the company was able to grow its revenues over the past ten years.
Source: Data from YCharts
By observing the chart, we can conclude that the business could have performed better. One of the largest risk factors to KO is management's responsiveness to managing growth, and asset value fluctuations. Assuming the company is better managed through cost-cuts, and better deployment of capital, the company will generate reasonable returns over a 5-year time span based on the forecast.
By 2018, I anticipate the company to generate $3.76 in earnings per share. This is because of product growth, improving global outlook, cost management, share buybacks, and continued development overseas.
The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5-years.
Below is a price chart incorporating the past 10 years and the next 6 years. Detailing 16 years in pricing based on my forecast and price history on December 31st of each year.
KO currently trades at $40.44. I have a price forecast of $38.18 for December 31st 2013. The stock is currently trading above fair valuation. The stock should be bought at pull backs as a part of a longer-term accumulation strategy.
The company is a good investment for the long-term. I anticipate KO to deliver upon the price and earnings forecast despite the risk factors (competition, regulation, economic environment). KO's primary upside catalyst is international expansion, product development, share buy-backs, organic growth and cost management. I anticipate the company to deliver upon my forecasted price target of $65.88 by 2018. This implies a return of 85.19% (including dividends) by 2018. This is a fantastic return for a beverage company.
Dividend Yield @ $23.37 per share
Coca Cola has a market capitalization of $180.2 billion; the added liquidity makes this an investment opportunity appropriate for larger institutions that require added liquidity. The risk is low (0.5 beta).
Coca Cola continues to expand around the world. "Open happiness", Coca Cola's marketing catch phrase should be rephrased to "invest in happiness."
The conclusion is clear: buy KO.