Coca-Cola (NYSE:KO) is a beverage company that offers a wide range of sparkling and non-sparkling non alcoholic beverages across the world. Our price target analysis projects $59 as KO's new price target with a Buy/Sell range from $47 to $65. Given KO's current stock price around $43, we rate this company a "Buy." Looking at the past fiscal-year performance where it saw increases in profitability margins and the current valuation we believe that although the PE shows fair value, the current stock price is under valued. We predict the company will out perform its current valuation over the2013 fiscal year. One of the catalysts that can spark this growth is a new product,Caffeine Free Coke Zero, which KO recently announced will launch mid-July. In all we see 2013 will be a prosperous year for KO exceeding what its current valuation is taking into account.
Coca-Cola Company oversees the manufacture, marketing and sale of its sparking and still beverages worldwide. Its carbonated beverages are nonalcoholic ready-to-drink beverages such as carbonated energy drinks, water, and flavored water. KO's still beverages are nonalcoholic beverages including non carbonated waters, flavored waters, energy drinks, juices, teas, coffees, and sport drinks. KO also offers flavoring ingredients, sweeteners, powders, beverage ingredients, and fountain syrups. KO sells its products under a range of brand names like Coca-Cola, Diet Coke, Sprite, Fanta, Powerade, Dasani, etc. KO manufactures and distributes its products through company-own and independently owned bottling operators, distributors, wholesalers, and retailers. KO was founded in 1886 and holds its headquarters in Atlanta, Georgia.
KO is currently valued with a PE of 20.0 and a future PE of 18.2. Compared with the industry average, 18.9, KO is a little more highly valued compared to the market but when we compare with leading competitors later in the article we will find that KO is overall undervalued at 20.0. Looking at KO's key ratios like ROA, ROE, and ROIC in comparison with market competitors will give us a good idea of this company's performance against the others. KO reported ROA at 10.9%, ROE at 28.0%, and ROIC at 13.9%. PepsiCo (NYSE:PEP), one of KO's market competitors, reported its ROA at 8.4%, ROE at 28.7%, and ROIC at 11.2%. Another competitor, Monster Beverage (NASDAQ:MNST), reported ROA at 28.3%, ROE at 41.9%, and ROIC at 41.9% as well. Compared with these two companies KO finds itself between the competitors. Altogether KO has strong key ratios and is predicted to grow in the coming months.
Since KO's future PE drops slightly this predicts growth for the company in the coming fiscal year. Analysts are predicting 6.5% growth for KO for the current year and 8.4% growth for the following fiscal year. Compared with the last five years, during which KO saw 8.2% growth, KO is predicted to see 9.0% growth during the next five years. All this is to say that though KO is currently undervalued and that the company will see growth in the coming fiscal year that is not taken into account at present. Thus we rate KO at a "Buy" because we predict the company will out perform the market, especially compared with its current valuation.
In a recent press release KO announced that this summer it would be offering a caffeine-free version of Coke Zero. This is an extension of one of the best-selling sparkling beverages on the market. Stuart Kronague, Head of Sparkling, Coca-Cola North America Group stated, "Caffeine-free products are growing in popularity, making up nearly 30 percent of all sparkling beverage sales in the U.S. By introducing Caffeine Free Coke Zero, we're giving fans exactly what they want, making the brand accessible for enjoyment all day along." Coke Zero has become visible to the public through many different marketing initiatives including sponsorship of the 2013 NCAA Men's Final Four and title co-sponsorship of ESPN's College GameDay. This platform will give marketers endless opportunities in promoting Caffeine Free Coke Zero. This new product will be available nationwide mid-July and will be available coast to coast in August. KO will be offering Caffeine Free Coke Zero in 12-packs of 12-ounce cans and 2-liter bottles as well as sampling opportunities for consumers.
Economic Moat -
KO is a very established company that has a loyal consumer base. As stated in the previous section KO has a strong presence at an array of very public events. Alongside these marketing opportunities KO also has a number of public figures like singer Taylor Swift as the faces of its television commercials. While this is important to any company, this does not constitute a strong economic moat. Competing beverage companies offer products similar to KO, so we believe that the company has a fairly light economic moat.
Revenue and EPS Outlook
Our price target analysis analyses the projected growth over the next five years for this company and gives us an estimate for the stock price over the course of the current 2013 fiscal year. Reflected in our first table is the projected growth in operating income. From 2013 to 2014 we predict 6.6% growth. The following price target was configured through a five-year projected discounted cash flow analysis. The model projects operating income, taxes, depreciation, capital expenditures, and changes in working capital. Using that information, we can project what the company is worth. We can then use that projection and compare it with current prices. We expect KO's current EPS of 0.44 to increase to 2.14 by Q3 of 2013. KO's market competitor MNST is also expected to increase in a similar range during the same time period from the current 0.41 to 2.26. On the contrary PEP is predicted to increase from its current EPS of 1.12 to 4.39 during the same period. This increase in earnings reflects our predictions that KO will see growth during the 2013 fiscal year.
Price Target Analysis
The following price target was configured through a five-year projected discounted cash flow analysis. The model projects operating income, taxes, depreciation, capital expenditures, and changes in working capital. Using that information, we can project what the company is worth. We can then use that projection and compare it with current prices.
Here is how to calculate price targets using discounted cash flow analysis:
(all figures in millions)
Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.
Available Cash Flow
Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012).
WACC for KO: 6,00%
PV Factor of WACC
PV of Available Cash Flow
For the fifth year, we calculate a residual calculation. This number is calculated by taking the fifth year available cash flow and dividing by the cap rate, which is calculated by taking WACC and subtracting out residual growth rate. Residual growth rate is typically between 2-6%; 4% is average growth for industry. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. This is why higher growth companies tend to have higher PE ratios. We will give you cap rate.
Cap Rate for KO: 3.0%
Available Cash Flow
Divided by Cap Rate
Multiply by 2016 PV Factor
PV of Residual Value
Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:
Sum of Available Cash Flows
PV of Residual Value
Interest Bearing Debt
Divide equity value by shares outstanding:
Profit/Value Industry Comparisons
Q1 - Q3 2011
Return on Equity
Let's look at KO's profitability margins and then compare them with market competitors. For the full fiscal year KO increased its operating margin from 21.8% to 22.4% 2011 to 2012. The gross margin decreased from 60.9% to 60.3%, and the ROE increased from 27.4% to 28.0%. During the same period PEP's operating margin decreased from 14.5% to 13.9%, its gross margin decreased from 52.5% to 52.2%, and ROE decreased from 30.7% to 28.7%. MNST's operating margin decreased from 26.8% to 26.7%, gross margin decreased from 52.5% to 51.7%, and ROE increased from 31.7% to 41.9% YoY. Dr. Pepper Snapple (NYSE:DPS) increased its operating margin from 17.3% to 18.2%, gross margin from 57.9% to 58.3%, and ROE from 25.7% to 27.7% YoY. Lastly Anheuser-Busch InBev SA/NV (NYSE:BUD) increased its operating margin from 31.6% to 32.0%, gross margin from 57.4% to 58.6%, and ROE from 16.1% to 18.4% YoY. When compared with other companies in the same sector we see that KO has average profitability ratios in operating margin and ROE but its gross margin is one of the best in this comparison.
As discussed briefly before we saw that KO's current PE at 20.0 is slightly higher than the industry average and that its future PE at 18.2 projects growth in revenues for the coming year. Let's compare these numbers with its competitors. PEP's PE is at 20.7 with a future PE of 17.0. MNST has a current PE of 29.7 and a future PE of 20.6. DPS's PE is at 15.9 and future PE is 14.2. BUD's PE is 21.9 and future PE is 17.9. KO follows the market trend, which is a current PE in the 18-20 range with a drop due to projected increases in revenues to the 16-18 range.
What could go wrong in our argument? There is a chance that KO will not see the growth and the increase in revenue we are anticipating. Instead of an increase in stock value the company would see a decrease. Capital being invested in the creating, production, and promotion of its new product Caffeine Free Coke Zero could be lost if the company doesn't see returns on those investments. There is also the possibility that the company could only see moderate increases in revenue from this new product and that the company's valuation would maintain itself.
The Bottom Line
Overall we see that KO is a healthy company that is currently fair valued with growth predicted for the 2013 fiscal year. It has announced a new product to be launched summer of 2013, with a large marketing platform in place to promote the new project. When compared with market competitors we see that KO is a strong competitor in the sector and even leads the numbers in certain profitability ratios. Given its recent performance and what that means for the coming fiscal year we believe that its fair valuation combined with its growth forecast justifies our "Buy" rating as we predict it will out perform the market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.