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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:
    FCF $Millions

    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
    FCF $Millions
    Terminal Value

    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.

    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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Comments (6)
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  • ozzfan1317
    , contributor
    Comments (225) | Send Message
    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
  • Eric Cota
    , contributor
    Comments (22) | Send Message
    Author’s reply » 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,
    19 Mar 2011, 12:59 AM Reply Like
  • ozzfan1317
    , contributor
    Comments (225) | Send Message
    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
  • Calculating WACC
    , contributor
    Comments (2) | Send Message
    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
  • Calculating WACC
    , contributor
    Comments (2) | Send Message
    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
  • Eric Cota
    , contributor
    Comments (22) | Send Message
    Author’s reply » 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
    Risk free rate = yield on U.S. 30 year treasury bond = 2.73%
    Market Risk Premium ~ 8%; perhaps a slightly high estimate for the average long term market risk premium


    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%


    Market Value for KO equity = $164 billion
    Market Value for KO debt = $17.4 billion
    KO tax rate ~ 24%


    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.


    19 Nov 2012, 04:15 AM Reply Like
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