If you're looking for a safe stock with strong fundamentals and top management, Coca Cola (KO) is one of your best friends. As confident I am in the company being an attractive defensive play, I am even more optimistic about Celsius Holdings (OTC:CELH) and Jones Soda (OTC:JSDA). These two smaller firms are significantly undervalued and, as an IR consultant, I expect them to generate significant returns when press coverage improves.
In this article, I will run you through a DCF analysis on Coca-Cola and then will triangulate the result with an exit multiple calculation and a review of the fundamentals compared to PepsiCo (PEP) and Dr. Pepper (DPS). Many bears see the company's growth story as over, but the growth story has yet to be fully factored into the stock price.
First, let's start with an assumption about revenues. Coca-Cola finished FY2011 with $46.5B in revenue, which represented a 32.5% gain off of the preceding year. Analysts model a 6.4% per annum growth rate over the next five years, which is reasonable in light of the firm's maturity.
Moving onto the cost-side of the equation, there are several items to consider: operating expenses, capital expenditures, and taxes. I expect cost of goods sold to eat 38% of revenue versus 22% for SG&A and 6.3% for capex. These figures are roughly in-line with the historical 3-year average levels. Taxes are estimated at 25%.
We then need to subtract out net increases in working capital. I model accounts receivables as 12% of revenue; inventories as 19% of COGS; prepaid expenses as 35% of SG&A; accounts payable as 8% of OPEX; and accrued expenses as 75% of SG&A.
Taking a perpetual growth rate of 2% and discounting backwards by a WACC of 8.5% yields a fair value figure of $89.36, implying 27.2% upside. The stock is priced as if it has a WACC of 10%. The unlevered beta is around 0.89 and the strong brand significantly reduces risk, so the WACC should be no 10% at the worst.
All of this falls under the context of strong momentum:
"[W]e achieved financial results for both the [fourth] quarter and the full year in line with or ahead of our long-term growth targets, making this the seventh consecutive quarter we have either met or exceeded our long-term growth targets.
Our global sparkling beverage portfolio kept growing, up 2% for the quarter and a solid 4% for the full year. Our global still beverage portfolio is also performing well, up 6% for the quarter and a strong 8% for the full year. And we gained global volume and value share in nonalcoholic ready-to-drink beverages, while also gaining global share in both sparkling and still beverage categories".
From a multiples perspective, Coca-Cola is at a premium. It trades at a respective 19x and 15.7x past and forward earnings versus 16x and 14.5x for PepsiCo, and 14.2x and 12.2x for Dr. Pepper. Assuming a multiple of 19x and a conservative 2013 EPS of $4.40, the rough intrinsic value of the stock is $83.60.
Consensus estimates for PepsiCo's EPS forecast that it will grow by 7% to $4.09 in 2012 and then turnaround to grow by 8.6% and 9.2% in the following two years. Assuming a multiple of 17.5x and a conservative 2013 EPS of $4.36, the rough intrinsic value of the stock is $76.30, implying 18.6% upside. The rumor is that the company is trying to find a successor for CEO Indra Nooyi who has struggled to grow shareholder value as rival Coca Cola soared since she took over. 2012 is gearing up to be an inflection point as the firm transition and cuts SG&A through rightfully slashing 8K jobs. Increased marketing of around $600M will also help capitalize on an improving recovery.Dr. Pepper was recently ranked the top dividend stock with insider buying by the Dividend Channel. With insiders accumulating more shares in the company, the wind is on the side of the bulls. Dr. Pepper has been overshadowed by Coca-Cola for too long - it also is an attractive defensive play.
Additional disclosure: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.