Revenue Decline Seems Priced In. KO Is Not A Sell.

Coca-Cola Company (KO) has been an investor's delight for years. The famous "New York bridge mode" business example fits well with KO. This simple beverage business grew as an international giant over year's providing decent returns.

However, KO has been facing a period of serious struggle with its revenue growth and earnings. Management has been putting blame on the bad weather in Asia and other regions with the CEO said "We continue to see further [unrest] in Europe slowing economic conditions across markets like Asia and Latin and social unrest in South East Europe, Middle East and Brazil.

On top of this we were faced with unusually widespread wet and cold weather conditions across the multiple regions, including North America and across Northern Europe and India all of which impacted the entire industry." Contributing to the downfall of KO is the failure of the company to meet the analyst's revenue growth estimates by $0.22billion. Moreover, KO has been facing serious law suits in New York and California for misleading benefits of their Vitamin water and Soft drinks.

We realize that although all these news certainly serve as a point of concern for investors, all these concerns are already priced in and therefore, the current market price has absorbed the after socks of the news. Therefore, we have a buy and hold rating because of the following reasons.

Financials

Financially, Coca-Cola has outperformed when it comes to net profit margin with a margin of 18.19% compared to the industry average of 12.35%. However, this performance is not as good as in the same period of the prior year. The main reason behind the decline this year is negative revenue growth which might keep the company in trouble for the next quarters of this year as well owing to the news of destruction of orange crops.

Source: YCHARTS

		KO	DPS	NSRGY	PEP	Average
Financial analysis	Net Profit Margin	18.19%	10.53%	11.49%	9.33%	12.385%
	Operating Profit Margin	23.25%	18.24%	15.64%	14.19%	17.830%
	ROA	8.08%	7.77%	7.51%	7.78%	7.785%
	ROE	26.59%	28.14%	18.30%	27.15%	25.045%
	Revenue Growth	-0.90%	1.33%	12.80%	1.20%	3.608%
	Debt to Equity	106.78	124.92	44.46	130.88	101.76
	Current Ratio	1.01	1.06	0.91	1.11	1.0225

Operating profit margin for KO is still higher than the industry average of 12.3%. This shows that the company has been out-performing in the industry despite downfall in its revenue growth and earning's performance. This indicates that the concerns about the drop in revenue are relative as the entire industry seems facing these. With a Return on assets of 8.08% and a return on equity of 26.59%, Coca-Cola Company seems to provide a safe shelter to its investors in the future as well.

However, we feel that company financial strategy is more aggressive than it key competitors. The debt to equity proportion of 106.78 is higher than the industry average of 101.76. This puts some concerns as the revenue is falling which might put liquidity pressure. Holistically, the financial performance of KO is satisfactory except for the negative trend in revenue growth which has some concerns for the analysts.

Relative Valuation

		Coca Cola COmpany	Dr Pepper Snapple (DPS)	Nestl (OTCPK:NSRGY)	Pepsico (PEP)	Average
Relative Valuation	Price to Sales	3.79	1.63	2.16	2.04	2.405
	EV/EBITDA	15.17	9.35	12.61	12.73	12.465
	PEG	2.45	2.04	4.3	2.33	2.78
	P/E (forward estimate)	19.3	15	19	18.5	17.95
	EPS (Forward Estimate)	2.28	3.32	4.04	4.77	3.6025
	Price Estimate	$44.00	49.8	76.76	88.245
	Current Price	40.81	47.91	67.03	86.8
	Capital Gain	7.26%	3.80%	12.68%	1.64%	6.342%
	Dividend Yield	2.70%	3.20%		2.70%	2.867%
	Estimated Total Gain	10.0%	7.00%	12.68%	4.34%	8.492%

To suggest any action for the investors, we rely more on the future of the company rather than its past performance. KO is currently trading at a price of $40.81 with a forward P/E ratio of 19.3, PEG ratio of 2.45 and forward EPS 2.28. Based on a forward EPS of 2.28 and a P/E of 19.3x, we suggest a target price of $44. With this price, we expect a capital gain of 7.26% and a total gain of 10% for the investors as illustrated in the table above. The capital as well as total gain of Coca-Cola Company leaves us quite optimistic for the investors as it is higher than the industry average of 8.49%. The growth of earning per share of KO has been in line with the analyst's estimates of $0.63 which leaves us positive about the company.

Conclusion

The price of the company has shown a very stable trend with minor fluctuation between $39 and $42 since the third quarter of 2012. Although in this quarter, price has shown some drop yet the overall trend as per technical analytics seems bullish.

Source: YCHARTS

Although the negative news a point of deep concern for investors, the news seems priced in and therefore, we forecast a good return for the investors of the company and hence have a bullish stance on the stock.

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.