Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Coca-Cola Company (NYSE:KO) fares in the ModernGraham valuation model.
KO data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$28.48|
|Value Based on 0% Growth||$16.69|
|Market Implied Growth Rate||5.48%|
Balance Sheet - 12/31/2013
Earnings Per Share
Earnings Per Share - ModernGraham
KO Dividend data by YCharts
Coca-Cola is a difficult company for value investors because it is so famous for being one of Warren Buffett's favorite investments, but the fact is that Buffett has moved away from Benjamin Graham's teachings, most likely because Buffett is able to exert significant pressure on management. As Coke looks today, it does not appear suitable for either the Defensive Investor or the Enterprising Investor. The company's current ratio is too low and the company's PB ratio is far too high for the Defensive Investor, and the company holds too much debt relative to its current assets for the Enterprising Investor. Value investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should explore other opportunities, such as through a review of 5 Low PEmg Companies for the Enterprising Investor and 5 Undervalued Companies for the Defensive Investor.
From a valuation perspective, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.29 in 2009 to $1.96. This level of growth supports the market's implied estimate for earnings growth of 5.48%, leading the ModernGraham valuation model to return an estimate of intrinsic value that is within a margin of safety as the price.
The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Coca-Cola Company? Where do you see the company going in the future? Is there a company you like better?
Disclosure: The author did not hold a position in Coca-Cola Company (KO) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.