I had recommended to buy The Coca-Cola Company (KO) back on February 28th, 2012, when the price was $67.51 (PM for my old report). There were many good reasons to suggest a positive outlook on KO. Using a DCF analysis, with a WACC of about 8%, and a perpetual growth rate around 2-3%, I believed that its intrinsic value resided in the mid 70's range. Of course, I had hoped KO would reach this price in a year or two, or even remain stagnant from the lack of volatility lately in its price. To my surprise, the price has climbed to $75.24 three months later (9/6/2012). This is a change of about 9.31% compared to -3.06% of the S&P 500 for the three month period. Also note that Director Richard M Daley bought 1000 shares on KO on February 24, 2012.
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Chart from Google
During February of 2012, gross profit margins were beginning to weaken as corn/HFCS prices were high due to weather conditions. However, KO was gaining slightly more market dominance, even taking a larger market share than Pepsico in North America. For example, Diet Coke (KO's number two) had surpassed Pepsico's (PEP) number one, Pepsi, in volume sales, for the first time according to Beverage-Digest. How embarrassing.
Now it's June, and much has changed.
- US Sugar Import Prices have fallen about 20% since. Gross profit margins will begin to see some improvement.
- An increasingly imminent European economic crisis is having material impact on volume sales. As a global company, KO is very diversified. Europe makes up about 16% of its entire case volume. Note that European KO President Dominique Reiniche sold 177,073 on May 21, 2012 at an average price of $75.23. While insider buying means only one thing, insider selling has many motives.
- NY is looking to ban 16 oz drinks that have more than 25 calories in 8 oz's. For context, NY has only 2.5% of the US population, and the US makes up of only 22% of case volume. While this story is suggestive of US's (long overdue) health conscious attitude towards their diet, KO's overall bottom line is much, MUCH larger. Besides, any gluttonous consumer can undermine this regulation by purchasing multiple soft-drinks instead.
- China lowers its interest rates which suggests of a slowing Pacific market. The Pacific (18% 2010 volume sales) is the second fastest growing geographic location for KO, which was off-setting Europe's slowing growth along with Eurasia.
While a macro view is important to assess KO's prospects, KO's economic moat is very resilient. Keep in mind that KO sells soft drinks, not luxury furniture. Even in the worst of the worst situations like the financial crisis, KO shrugged it off and continued to steadily grow its volume and bottom-line while its stock fell to a low of $39.
KO is doing fine, and investors should hold this stock as long as soft-drinks are still considered a staple beverage for Americans. However, KO at $75 is not an extremely attractive price according to my DCF calculations. I definitely wouldn't short KO either. Currently, its P/E of 19 is appropriate, which is close to its long-term average. If you already have this stock, hold it. If not, wait for a better time to buy KO at a depressed price, assuming the fundamentals are still intact.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
