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Summary

  • We pitch two companies from the soft drinks sector, Coca-Cola and Monster, against one another in the latest instalment of our Head-To-Head series.
  • The article focuses on the relative strengths and weaknesses of Coca-Cola and Monster based on business performance and sustainability/dividends/forecasts.
  • It ends with discussion of the current valuations of the two companies, and details whether Coca-Cola represents good relative value at current price levels.

Coca-Cola Background

Coca-Cola (NYSE:KO) sells nonalcoholic beverages, including sparkling beverages and still beverages worldwide. Its sparkling beverages include carbonated energy drinks, carbonated waters and flavored waters. Its still beverages comprise noncarbonated waters, flavored and enhanced waters, noncarbonated energy drinks, juices and juice drinks, ready-to-drink teas and coffees, and sports drinks. It also provides flavoring ingredients, sweeteners, beverage ingredients, and fountain syrups, as well as powders for purified water products. The company sells its products primarily under the Coca-Cola, Diet Coke, Coca-Cola Light, Coca-Cola Zero, Sprite, Fanta, Minute Maid, Powerade, Aquarius, Dasani, Glacéau Vitaminwater, Georgia, Simply, Minute Maid Pulpy, Del Valle, Ayataka, Bonaqua/Bonaqa, and Schweppes brand names. It was founded in 1886 and is headquartered in Atlanta, Georgia.

Team Money Research Rating

Our investment philosophy is to focus on company fundamentals and identify stocks that are displaying strong business performance, that operate sustainably and that pay a decent, well-covered dividend.

We analyze each company relative to the other on the following criteria within each of our two main buckets:

Business Performance

  1. Return on equity
  2. Return on assets
  3. Operating margins
  4. Quarterly revenue growth
  5. Quarterly earnings growth

Sustainability/Dividends/Forecasts

  1. Debt to equity ratio
  2. Interest cover
  3. Dividend payout ratio
  4. Forward yield
  5. Annual EPS growth forecast

Once we have analyzed the two companies based on the first two buckets, we can then assess whether they represent good value based on the current prices of the two stocks. We use the following criteria to assess valuations on a relative basis.

Valuation

  1. Forward price to earnings ratio
  2. Price to book value ratio
  3. Enterprise value to EBITDA
  4. Price to 3-year average free cash flow ratio
  5. 5-year price to earnings growth ratio

So, for example, a company that performs well compared to its rival on the first two buckets (business performance and sustainability/dividends/forecasts) and that is undervalued relative to its peer (based on the third bucket: valuation) could outperform its competitor going forward.

The table below provides the data that we will use to analyze Coca-Cola and Monster (NASDAQ:MNST) for the first two buckets.

Stock

Coca-Cola

Monster

Business Performance

Return on equity

25.08%

41.06%

Return on assets

7.46%

28.14%

Operating margins

23.90%

26.85%

Quarterly rev. growth

-1.40%

10.70%

Quarterly EPS growth

-3.00%

50.00%

Sustainability/Dividends/Forecast

Debt to equity ratio

117.32%

N/A

Interest cover

25.79

N/A

Dividend payout ratio

61.00%

N/A

Forward dividend yield

2.90%

N/A

Annual EPS growth forecast

6.73%

16.33%

As you can see from the numbers in the first bucket: business performance, Coca-Cola is easily outperformed by its smaller rival, Monster. Indeed, while we are impressed with Coca-Cola's profitability, with its return on equity of 25.08% and operating margins of 23.90% being particularly attractive, they are outdone by the same figures for Monster. Indeed, Monster posted return on equity of 41.06% and operating margins of 26.85%, which are both strong numbers. However, what makes the return on equity figure particularly positive is the fact that the company has no debt, so is just financed by equity. This means that, unlike Coca-Cola which has a debt to equity ratio of 117.32%, Monster does not benefit from a debt financing boost to profitability, which makes its scores in the first bucket all the more attractive.

While on the topic of debt, we feel that Coca-Cola's current level of financial leverage is comfortable as a result of its interest cover of 25.79. Furthermore, we are impressed with its yield of 2.90% and feel that the dividend payout ratio of 61.00% could go higher, while the company continues to invest heavily in the business. Meanwhile, Monster does not pay a dividend, although its focus on reinvesting appears to be paying off, since it is due to record EPS growth of 16.33% next year, versus 6.73% for Coca-Cola.

Overall, while we are impressed with Coca-Cola's scores, we feel that the company is edged out by Monster as a result of its superb profitability and higher forecast growth rate in earnings.

Valuation

Due to its underperformance of Monster in the first two buckets, we would expect Coca-Cola to trade at a discount to its smaller peer. Let's see if it does.

Stock

Coca-Cola

Monster

Valuation

Forward price to earnings ratio

18.46

22.75

Price to book ratio

5.27

10.10

EV/EBITDA

15.20

16.20

PEG

3.23

1.74

Price to free cash flow ratio

24.02

39.12

Although Coca-Cola trades at a discount in four of the five valuation criteria, we feel that the discount is too narrow. For example, Coca-Cola's forward P/E ratio is only 18.85% lower than that of Monster, while its EV/EBITDA ratio is only 6.17% behind that of its smaller peer. Certainly, the two companies' price to book ratios are far wider (5.27 for Coca-Cola versus 10.10 for Monster), while the price to free cash flow ratio also has a wide variation at 24.02 for Coca-Cola and 39.12 for Monster. However, the PEG ratio points to better value at Monster rather than Coca-Cola, with the former having a PEG ratio of 1.74, while the latter has a PEG ratio of 3.23. Due to this, as well as the narrower discounts than we expected on the P/E and EV/EBITDA ratios, we feel that Coca-Cola could underperform Monster going forward.

Conclusion

Coca-Cola is a high quality company that posted impressive scores on The Team Money Research Rating System. Its scores, though, were not on par with sector peer, Monster, as its profitability was behind that of its smaller peer and its earnings growth prospects were considerably lower. Furthermore, the difference between the two companies' valuations appears to be too wide in our view and, as a result, we believe that Coca-Cola could underperform Monster going forward.

Don't forget to follow Team Money Research and let us know which stocks you'd like to see go head-to-head against Coca-Cola in future articles!

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.