Coca-Cola: Free Cash Driving Shareholder Value

| About: The Coca-Cola (KO)
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How is Muhtar Kent's Vision 2020 developing?

From a fundamental point of view how does Coca-Cola look?

Valuation at this point in the market.

When Muhtar Kent became CEO of Coca-Cola (NYSE:KO) in 2008, he established a long-term vision for restoring growth. "2020 Vision" was designed to help the company focus on understanding the trends and forces that will shape their business in the future and enable them to move swiftly in preparation for what's to come. In short, the company must get ready for tomorrow, today.

In a 2011 article published by the Harvard Business Review, CEO Muhtar Kent indicated he was not happy with the direction the company was heading in, when he took over. He stated: "we weren't cracking the code for growth," "We had become arrogant." So through this vision, CEO Muhtar Kent set a goal to double the business by 2020.

As we are six years into CEO Muhtar Kent's term, using the analysis below, I will analyze some aspects of Coca-Cola's past performance. From this evaluation, we will be able to see how Coca-Cola has fared over the past four years regarding their profitability, debt and capital, and operating efficiency. Based on this information, we will be able to see how 2020 Vision is progressing. We will look for strengths and weaknesses within the company's fundamentals which should give us an understanding of how the company has fared over the past few years and will give us an idea of what to expect in the future.

Definitions sourced by Investopedia.


Profitability is a class of financial metrics used to assess a business's ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: net income, operating cash flow, return on assets, and quality of earnings. From these four metrics, we will establish if the company is making money and gauge the quality of the reported profits.

  • Net income 2011 = $8.572 billion
  • Net income 2012 = $9.019 billion
  • Net income 2013 = $8.584 billion.
  • Net income 2014 TTM = $8.452 billion.

Over the three and a half years, Coca-Cola's net profits have decreased from $8.572 billion in 2011 to $8.452 billion in 2014 TTM.

  • Operating income 2011 = $10.154 billion.
  • Operating income 2012 = $10.779 billion.
  • Operating income 2013 = $10.228 billion.
  • Operating income 2014 TTM = $10.196 billion.

Operating income is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Over the past three and a half years, Coca-Cola's operating income has been essentially flat. The operating income has increased from $10.154 billion in 2011 to $10.196 billion 2014 TTM.

ROA - Return On Assets = Net Income/Total Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."

  • Net income growth

    • Net income 2011 = $8.572 billion
    • Net income 2012 = $9.019 billion
    • Net income 2013 = $8.584 billion.
    • Net income 2014 TTM = $8.452 billion.
  • Total asset growth

    • Total assets 2011 = $79.974 billion.
    • Total assets 2012 = $86.174 billion.
    • Total assets 2013 = $90.055 billion.
    • Total assets 2014 TTM = $91.289 billion.
  • ROA - Return on assets

    • Return on assets 2011 = 10.72%.
    • Return on assets 2012 = 10.45%
    • Return on assets 2013 = 9.53%.
    • Return on assets 2014 TTM = 9.26%.

Over the past three and a half years, Coca-Cola's ROA has decreased from 10.72% in 2011 to 9.26% in 2014 TTM. This indicates that the company is making slightly less on its assets than they did in 2011.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt.

  • Total assets

    • Total assets 2011 = $79.974 billion.
    • Total assets 2012 = $86.174 billion.
    • Total assets 2013 = $90.055 billion.
    • Total assets 2014 TTM = $91.289 billion.
    • Equals an increase of $11.315 billion
  • Total liabilities

    • Total liabilities 2011 = $48.339 billion.
    • Total liabilities 2012 = $53.384 billion.
    • Total liabilities 2013 = $56.882 billion.
    • Total liabilities 2014 TTM = $58.635 billion.
    • Equals an increase of $10.296 billion

Over the past three and a half years, the company's total assets have increased by $11.315 billion, while the total liabilities have increased by $10.296 billion. This indicates that the company's assets have increased more than the liabilities thus adding shareholder value.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm's financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current assets / Current liabilities

  • Current assets

    • Current assets 2011 = $25.497 billion.
    • Current assets 2012 = $30.328 billion.
    • Current assets 2013 = $31.304 billion.
    • Current assets 2014 TTM = $31.052 billion.
  • Current liabilities

    • Current liabilities 2011 = $24.283 billion.
    • Current liabilities 2012 = $27.821 billion
    • Current liabilities 2013 = $27.811 billion.
    • Current liabilities 2014 TTM = $30.056 billion.
  • Current ratio 2011 = 1.05
  • Current ratio 2012 = 1.09
  • Current ratio 2013 = 1.13
  • Current ratio 2014 TTM = 1.03

Over the past three and a half years, Coca-Cola's current ratio has remained relatively the same. As the ratio is above 1, this indicates that Coca-Cola would be able to pay off its obligations if they came due at this point.

Common Shares Outstanding

  • 2011 shares outstanding = 4.646 billion.
  • 2012 shares outstanding = 4.584 billion.
  • 2013 shares outstanding = 4.509 billion.
  • 2014 TTM shares outstanding = 4.395 billion.

KO Shares Outstanding Chart

KO Shares Outstanding data by YCharts

Over the past three and a half years, the number of company shares has decreased significantly. The amount of common shares has decreased from 4.646 billion in 2011 to 4.395 billion in 2014 TTM. In 2014, the Coca-Cola Company is estimating to spend between $2.5 to $3.0 billion in share repurchases. As the company is buying back shares, this should have a positive effect on shareholder value.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The Gross Profit Margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross margin 2011 = $28.326 billion / $46.542 billion = 60.68%.
  • Gross margin 2012 = $28.964 billion / $48.017 billion = 60.32%.
  • Gross margin 2013 = $28.433 billion / $46.854 billion = 60.68%.
  • Gross margin 2014 TTM = $28.215 billion / $46.395 billion = 60.81%.

Over the past three and a half years, Coca-Cola's gross margin has remained in the 60% range. As the margin remained relatively flat, even with Coke's M&A activity, the company's efficiency has remained relatively the same.

KO Gross Profit Margin (<a href=

KO Gross Profit Margin (TTM) data by YCharts

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company's income statement and the denominator shows total assets, which are found on a company's balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth

    • Revenue 2011 = $46.542 billion.
    • Revenue 2012 = $48.017 billion.
    • Revenue 2013 = $46.854 billion.
    • Revenue 2014 TTM = $46.395 billion.
    • Equals a decrease of 0.003%.
  • Total Asset growth

    • Total assets 2011 = $79.974 billion.
    • Total assets 2012 = $86.174 billion.
    • Total assets 2013 = $90.055 billion.
    • Total assets 2014 TTM = $91.289 billion.
    • Equals an increase of 14.15%.

As the revenue growth has remained flat while the assets have increased by 14.15%, this indicates that the company has been generating the same amount of revenue with more assets, effectively becoming less efficient at creating revenues.

Cash Flow

Free Cash Flow = Operating Cash Flow - Capital Expenditure

Over the past three and a half years, Coca-Cola has posted positive free cash in every year. In a business that is looking to spend a lot of cash in advertising to support business growth and increasing their dividend to keep shareholders happy, this indicates that Coca-Cola can support these costs without adding additional risk to the company and ultimately the shareholder.

  • 2011 - $9.474 billion - $2.920 billion = $6.554 billion
  • 2012 - $10.645 billion - $2.780 billion = $7.865 billion
  • 2013 - $10.542 billion - $2.550 billion = $7.992 billion
  • 2014 TTM - $11.130 billion - $2.501 billion = $8.629 billion

KO Free Cash Flow (<a href=

KO Free Cash Flow (TTM) data by YCharts

Based on the information above, we are seeing a "mixed bag" of results regarding Coca-Cola's fundamentals. The analysis is revealing that growth as far as revenue, operating income and ROA has been relatively flat. One of the major obstacles that Coca-Cola is facing, along with competitors PepsiCo (NYSE:PEP) and Dr.Pepper Snapple (NYSE:DPS), is declining soda sales in developed regions of the world, especially North America. As people are becoming more aware of the effects of High Fructose Corn Syrup, Refined Sugar, Artificial Sweeteners and Phosphoric acid many people are making different choices than they were years ago.

Even though Coca-Cola is battling limited growth and external pressures, internal adjustments made by management regarding productivity improvements including higher bottling cost savings are creating a significant surge in free cash. Over the past three and a half years Coca-Cola's free cash has increased from $6.554 billion to $8.629 billion. This is of utmost importance to the investor, as free cash is vital in maintaining Coca-Cola's history of dividend increases. As the company's free cash is in the range of $8.629 billion, this indicates that Coca-Cola has significant cash to pay and support dividend increases.

Earnings and Dividend

With CEO Muhtar Kent's efforts to manage costs and buy back shares, the stock does look attractive from the dividend investor point of view.

With excess of $8 billion in free cash, this gives management the ability to continue to grow the dividend, buy back shares, make strategic acquisitions and focus on their marketing campaigns.

As a company like Coca-Cola rarely goes "on sale," estimating an entry point can be a challenge. In the section below, I will use the DCF valuation to estimate what fair value is.


In the section below, I will use a couple of different methods to find a valuation of the stock price. In this section, I will use the Discounted Cash Flow valuation model to estimate the current value and target price for each share.

I believe using the Discounted Cash Flow valuation model for Coca-Cola to be fair, because DCF analysis can help one see where the company's value is coming from and can generate an opinion based on that.

Even though there are variations in calculating this formula, this model is based off of a terminal value of $169.813 billion and a WACC of 4.00%. The terminal value of $169.813 billion is based off of the company trading at an industry average of 13.95x EBITDA. Using this valuation, I have concluded Coca-Cola's value to be ~$36.03 per share.

Market outlook

As the chart below indicates, over the long-term there is a strong correlation between Coca-Cola's free cash, Coca-Cola's stock price and the S&P 500.

KO Chart

KO data by YCharts

As I believe valuations are getting high, I would not be surprised if there was a 5%-10% correction over the next few months. If such a correction were to occur, this could present an excellent opportunity to add positions in Coca-Cola. As the chart above indicates, when there has been a correction, Coca-Cola's stock price gravitates back to where Coca-Cola's free cash flow numbers are. As the free cash currently looks strong, I believe adding Coca-Cola's shares on a correction would offer an excellent opportunity.

Currently, I believe there is further upside to equity markets as major world economies are either recovering or on the verge of recovering. As interest rates continue to remain near zero, this should favor equities.


Based on the analysis above, Coca-Cola's fundamentals are displaying a "mixed bag" of results. Having stated that one aspect of the company that is significantly increasing over the past six years is the company's free cash.

Over the past six years since Muhtar Kent became CEO, Coca-Cola's free cash has increased from ~$5.5 billion to ~$8.6 billion. So even though the company is facing external pressures especially in North America, Muhtar Kent's ability to increase the free cash gives the investor confidence that Coca-Cola has the ability to grow its dividend, buy back shares and ultimately increase shareholder value.

Long term, if you bought the stock at this price, I believe you would be handsomely rewarded. Having stated that, at current levels, I believe that Coca-Cola is slightly overvalued. In my opinion, if you can buy the stock closer to the $36.00 range, this would represent an excellent buying opportunity.

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