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Is it time to be bearish about The Coca-Cola Company's (NYSE:KO) stock price? The EV/EBITDA value seems to suggest so. The EV/EBITDA is the enterprise multiple and it takes into account a company's debt and cash levels in addition to its stock price and relates that value to the firm's cash profitability. The enterprise multiple is seen as the most encompassing and generally considered the most useful in analyzing the current valuation of a stock.

Earnings Before Interest, Taxes, Depreciation, and Amortization [EBITDA] is often more desirable than P/E because it is considered less docile than earnings and P/B because it is a better measure of cash profitability than book value. However, it is not without its flaws.

Taking out interest, taxes, depreciation and amortization can make even completely unprofitable companies appear to be financially healthy. A look back at the dotcoms offers numerous examples of firms that actually had no future, no hope and certainly no earnings, but became the darlings of the investment world. The use of EBITDA as a measure of fiscal health made these companies look attractive.

It is always best to look at several different multiples. Still, the EV/EBITDA gives a good picture about the value of a stock like KO.

Product Innovation and Emerging Markets

Before delving deeper into the EV/EBITDA, lets highlight some of the challenges that Coca-Cola faces and the strategic investments the beverage company has made in the recent past.

Coca-Cola has seen declining sales in the United States. Soda sales at U.S. stores slid 0.6% in 2012, and December alone accounted for a 2.8% slump in sales. Therefore, the company has decided to tap the emerging markets. KO is investing heavily in China and India with $4B being poured into China through 2014. There will also be an expansion in the production and distribution facilities in India that will cost about $5B. Coca-Cola is moving in the right direction and it has started focusing on low-calorie drinks to fuel growth.

Consumers are becoming more health conscious and so non-carbonated beverages are growing at a faster rate than carbonated drinks. Although Coca-Cola depends on carbonated soft drinks a great deal, it's commendably expanded its non-carbonated offerings, with its majority ownership stake in Zico coconut water being one of the big breakthroughs.

EBITDA Calculation

To compute EBITDA, equity analysts start with net earnings. Interest expenses, taxes, depreciation and amortization are then added to that earnings number.

12 months ended

Dec 31, 2012

Dec 31, 2011

Dec 31, 2010

Dec 31, 2009

Dec 31, 2008

Net income

9,019

8,572

11,809

6,824

5,807

Net income attributable to noncontrolling interests

67

62

50

82

67

Interest expense

397

417

733

355

438

Provision for Income Tax

2,723

2,805

2,384

2,040

1,632

Earnings before interest and tax (EBIT)

12,206

11,856

14,976

9,301

7,944

Depreciation and amortization

1,982

1,954

1,443

1,236

1,228

Earnings before interest, tax, depreciation and amortization (EBITDA)

14,188

13,810

16,419

10,537

9,172

Source: Coca-Cola Co.'s Annual Report

The Coca-Cola Co.'s EBITDA fell from 2010 to 2011, but then rose slightly from 2011 to 2012.

Current EV/EBITDA

Coca-Cola Co.

Consumer Goods

Selected Financial Data (USD $ in millions)

Enterprise value [EV]

207,719

Earnings before interest, tax, depreciation and amortization (EBITDA)

14,188

Ratio

EV/EBITDA

14.64

13.34

The PepsiCo, Inc. (NYSE:PEP) actually has a lower EV/EBITDA than the consumer goods industry with a 12.77 value. PepsiCo is relatively undervalued whereas Coca-Cola is relatively overvalued. This holds true even when looking at the historical EV/EBITDA ratios over the last 5 years.

EV/EBITDA Historical Ratios

Dec 31, 2012

Dec 31, 2011

Dec 31, 2010

Dec 31, 2009

Dec 31, 2008

Selected Financial Data (USD $ in millions)

Enterprise value

187,798

171,387

159,047

124,719

99,809

Earnings before interest, tax, depreciation and amortization (EBITDA)

14,188

13,810

16,419

10,537

9,172

EV/EBITDA, Comparison to Industry

Coca-Cola Co.

13.24

12.41

9.69

11.84

10.88

Industry, Consumer Goods

11.58

10.24

9.88

10.99

7.99

The EV/EBITDA is useful for transnational comparisons because it ignores the distorting effects of individual countries' taxation policies. Let's now look at how the Enterprise Value is obtained.

Current EV calculation

Current share price

$ 42.92

No. shares of common stock outstanding

4,456,717,996

Common equity (market value)

191,282

Add: Equity attributable to noncontrolling interests (per books)

378

Total equity

191,660

Add: Loans and notes payable (per books)

16,297

Add: Current maturities of long-term debt (per books)

1,577

Add: Long-term debt (per books)

14,736

Total equity and debt

224,270

Less: Cash and cash equivalents

8,442

Less: Short-term investments

5,017

Less: Marketable securities

3,092

Enterprise value

207,719

(USD $ in millions)

EV is the market value of common equity, preferred equity and debt minus the cash and short-term investments value. Coca-Cola's EV went up from 2010 to 2011 and then again from 2011 to 2012.

Conclusion: Time to Short?

Warren Buffett has continued to invest in Coca-Cola. The highly successful value investor first purchased the stock in 1988, and factoring in reinvested dividends it has gained more than 1,000% since.

Certainly, the price action indicates an uptrend over the long term. But in the near term there could be opportunities for bears to make money shorting the stock. The share price had hit the 52-week high last Thursday and then fallen back down slightly. Additionally, the Moving Average Convergence Divergence [MACD] indicator has entered into bearish territory.

After considering the relatively high EV/EBITDA value of 14.64, options traders might look to buy puts on KO with near term expirations. This may also be a good time for value investors to dollar cost average on KO stock.

Note: All material sourced from Morningstar and MSN Money.

Source: High EV/EBITDA Suggests To Short Coca-Cola