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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • Coca Cola Company: cash flow valuation 6 comments
    Mar 18, 2011 3:52 PM | about stocks: KO
    Current Price: ~ $63/share
    Projected Yield: ~ 3%



    I believe Coca-Cola ($KO) is fairly valued at $50/share on a cash flow valuation basis.    


    Coca-Cola is the world's largest manufacturer, distributor, and marketer of nonalcoholic beverage concentrates and syrups. The firm also sells a variety of noncarbonated drinks such as water, juices, and teas. With almost three fourths of the company's revenue generated outside the United States, Coke's footprint extends throughout the world. Coke's core brands include Coca-Cola, Sprite, Dasani, Powerade, and Minute Maid.

    I estimated the firm's WACC today at 8.22% using the Capital Asset Pricing Model and the company's recent SEC filings.
     

    Recent free cash flows and noted growth rates:
     
    Year
    FCF $Millions
    2001
    3341
    2002
    3891
    2003
    4644
    2004
    5213
    2005
    5524
    2006
    4550
    2007
    5502
    2008
    5603
    2009
    6193
    2010
    7317


    Average Annual Growth FCF: approx. 10%
    CAGR FCF: approx. 9%
    Consensus Forecast Industry 5-Year Growth: approx. 14% per year
    Consensus Forecast Company 5-Year Growth: approx. 9% per year
     
    Assuming the company achieves a 5-year growth rate in FCF of 9% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:
    Discounted Cash Flow Valuation
     
    Year
    FCF $Millions
    0
    7317
    1
    7976
    2
    8693
    3
    9476
    4
    10329
    5
    11258
    Terminal Value
    149325


    The firm's future cash flows, discounted at a WACC of 8.22%, give a present value for the entire firm (Debt + Equity) of $137,995 million. If the firm's fair value of debt is estimated at $24,318 million, then the fair value of the firm's equity could be $113,677 million.  $113,677 million / 2290 million outstanding shares is approximately $50 per share and a 20% margin of safety is $40/share.


    Sources
    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 
    Stocks: KO
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This post has 6 comments:

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  •  
    This gives you an idea OF how cheap the company is. This a really conservative analysis assuming no growth after 5 years. If you assume continued 9-10% growth you get a fair value closer to 70 dollars.
    18 Mar 2011, 11:02 PM Reply Like
  •  
    Hi ozzfan,

    Thanks for the comment. As a value investor, I hope my assumptions are conservative enough to build in an adequate margin of safety to cut the chances of overpaying. I'm glad the analysis allowed you to make your own assumptions (about the WACC, future growth, etc.) to draw your own conclusion about the value of KO's future cash flows. Way to go. Great company, great brand, great product - just wish I could get it for less.

    All the best,
    Eric
    19 Mar 2011, 12:59 AM Reply Like
  •  
    I agree I bought my shares at 40 but prices that cheap are rare. Still a solid part of any portfolio nice writeup thanks for sharing your thoughts.
    19 Mar 2011, 07:58 PM Reply Like
  •  
    Your calculation of WACC seems high to me. Using a beta of approximately 0.54, risk free rate of 2.8%, risk premium of 5.2%, I get a cost of equity of about 5.6%. Coupled with a lower cost of debt, I don't know how you can get to that number. Now I realize this is from over a year ago, but I don't think too much has changed in terms of those numbers. I'm curious as to what inputs you used?
    19 Nov 2012, 02:16 AM Reply Like
  •  
    What assumptions did you use to calculate cost of equity? I'm using a beta of 0.54, risk-free rate of 2.8% and market risk premium of 5.2% and getting a cost of equity of 5.6%, for a much lower WACC than you have.
    19 Nov 2012, 02:16 AM Reply Like
  •  
    Thanks for the comments. My estimates and assumptions regarding a firm's WACC are purposefully high because I use a discounted cash flow model to find firms that are more likely undervalued with a margin of safety.

    Here are the assumptions I would use to calculate a WACC for Coca Cola today:

    For Coke's Cost of Equity I would use the CAPM model
    Beta = .42 http://goo.gl/udlzu
    Risk free rate = yield on U.S. 30 year treasury bond = 2.73% http://goo.gl/G1Bbs
    Market Risk Premium ~ 8%; perhaps a slightly high estimate for the average long term market risk premium http://goo.gl/ZnUFe

    KO cost of equity = 2.73 + .42(8) = 6.09%

    Coke's Cost of Debt = weighted average yield on the market value of KO's debt but I don't mind a high estimate so I simplify and go with the highest yielding debt for KO = 4.482% http://goo.gl/e2xVZ

    Market Value for KO equity = $164 billion http://goo.gl/r3sbi
    Market Value for KO debt = $17.4 billion http://goo.gl/Ed2Aq
    KO tax rate ~ 24% http://goo.gl/Ed2Aq

    So my estimate for KO WACC today ~ 5.83%

    How does this compare to your estimated WACC?

    I hope this helps - Please let me know if you have any questions.

    Eric
    19 Nov 2012, 04:15 AM Reply Like
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