Coca-Cola: The Pop Isn't Going To Fizz Away Anytime Soon

| About: The Coca-Cola (KO)

A couple of months ago, the Coca-Cola Company's (NYSE:KO) seemed like a good stock to short. It was the EV/EBITDA multiple that suggested so at the time. This indication by the EV/EBITDA multiple proved to be right as the stock has fallen 3.95% since we made that bold prediction.

Now we are here to tell you that this is a great time to be bullish on KO stock again. The fact is that it is always a good time to be upbeat about KO over the long term, but this time we are optimistic both in the short and long-term.

What has us excited is the growing free cash flow to equity (FCFE) figure. Furthermore, Coca-Cola is a great stock to hold for its cool dividend. If you're looking for a long-term dividend stock idea, then Coke is the way to go.

FCFE

This is a measure of how much cash can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment.

Calculated as: FCFE = Net Income + Depreciation & Amortization - Capital Expenditure - Change in Non-Cash Working Capital + New Debt Issued

Here is how the FCFE for the past 5 years is arrived at.

12 months ended

Dec 31, 2012

Dec 31, 2011

Dec 31, 2010

Dec 31, 2009

Dec 31, 2008

Net Income

9,086

8,634

11,859

6,906

5,807

Add: Depreciation & Amortization

1,982

1,954

1,443

1,236

1,228

Capital Expenditure

(2,780)

(2,920)

(2,215)

(1,993)

(1,968)

Change in non-cash working capital

(-5654)

(-6143)

(-2255)

(2322)

(-300)

Add: Net debt issued

1080

(385)

8982

2278

(496)

Free Cash Flow to Equity [FCFE]

15,022

13,426

22,324

6,105

4,871

USD $ in millions

Coca-Cola's FCFE declined from 2010 to 2011, but then rose from 2011 to 2012.

As the dividend discount model's worth has become gradually more scrutinized, the FCFE has gained popularity as a discounted cash flow (DCF) technique.

This alternative method of valuation is frequently used by analysts in an attempt to determine the value of a company.

Current P/FCFE Ratio

Financial Figures

Coca-Cola Co.

Consumer Goods

Shares of common stock outstanding

4,434,064,580

FCFE (millions)

15,022

FCFE per share1

3.39

Current share price [P]

40.57

P/FCFE2

11.97

20.26

USD $

1. FCFE per share = FCFE ÷ Shares of common stock outstanding

15,022,000,000 ÷ 4,456,717,996 = 2.74

2. P/FCFE = Share price ÷ FCFE per share

= 40.67 ÷ 3.39 = 14.02

Coca-Cola's P/FCFE is lower than the consumer goods industry average and so this beverage stock is relatively undervalued. Value investors love it when great companies see their stock price temporarily plunge as this signifies a good buying opportunity. And this valuation metric confirms it.

P/FCFE Ratios: Past 5 Years

Financial Figures

Dec 31, 2012

Dec 31, 2011

Dec 31, 2010

Dec 31, 2009

Dec 31, 2008

Shares of common stock outstanding1

4,456,717,996

4,526,408,442

4,588,633,662

4,610,247,876

4,629,316,324

FCFE (millions)

15,022

13,426

22,324

6,105

4,871

FCFE per share

3.37

2.97

4.87

1.32

1.05

Share price1,2

38.45

34.59

31.96

26.36

20.54

P/FCFE

11.41

11.65

6.56

19.96

19.52

Comparison to Consumer Goods Industry

17.95

11.53

12.16

13.80

9.83

USD $

1. Figures revised for splits and stock dividends

2. Close price on the filing date of Coca-Cola Co.'s Annual Report

It is also extremely useful to compare to the company's past levels of price-to-free-cash flow-to-equity along with comparing the average within its industry.

Coca-Cola's P/FCFE ratio surged from 2010 to 2011 but has since fallen slightly.

Conclusion: Earnings misses have led to long-term buying opportunities

Shares of Coca-Cola have been on a downtrend ever since earnings came out before the opening bell rang on July 16. Revenue was reported to have declined to $12.75B, missing estimates of $12.95B. It was the unexpected cool and wet weather that was blamed by Coke for the dreary sales quarter that saw consumption drop in both domestic and international markets.

Even with the disappointing earnings results, there is a silver lining. Coca-Cola has had fairly impressive sales numbers for noncarbonated beverages. The overall volume for noncarbonated drinks increased by 5% in North America for this past quarter. It seems like the introduction of products such as Dasani bottled water, SmartWater, and Powerade is working out for the cola company. This product innovation will be the key as we mentioned in our previous article on Coke.

It will be these noncarbonated offerings that will determine the future success of Coca-Cola. After all, the demand for noncarbonated drinks is growing at a much faster rate than carbonated ones. Already noncarbonated beverages make up about 25% of Coca-Cola's worldwide revenues. Analysts expect this percentage to go up over the next few years.

Add this to the fact that KO has impressive free cash flow to equity figures, and this makes it one of the perennial best stocks out there.

All material sourced from Morningstar and Yahoo! Finance.

Disclosure: I am long KO.

Business relationship disclosure: This article was written by a research analyst at Investor Aide. Investor Aide is not receiving compensation for it (other than from Seeking Alpha). Investor Aide has no business relationship with any company whose stock is mentioned in this article.