Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Coca-Cola Co: Cash Flow Valuation Update

|Includes: The Coca-Cola Company (KO)

Current Price: ~ $71/share
Projected Yield: ~ 2.90%

Coca-Cola is the world's largest nonalcoholic beverage company. The firm, which sells a variety of sparkling and still beverages, generates 70% of its revenue and about 80% of its operating profit from outside of the United States. Coke's core brands include: Coca-Cola, Sprite, Dasani, Powerade, and Minute Maid. Following the asset swap with CCE, Coke now owns around 80% of its distribution in North America.

Estimated WACC for the firm today is 6.43% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year FCF $Millions
2002 3891
2003 4644
2004 5213
2005 5524
2006 4550
2007 5502
2008 5603
2009 6193
2010 7317
2011 6554

Average Annual Growth FCF: ~ 7%

CAGR FCF: ~ 6%
Consensus Forecast Industry 5-Year Growth: ~ 13% per year

Consensus Forecast Company 5-Year Growth: ~ 6% per year

Internal Growth Rate: ~ 6%

Sustainable Growth Rate: ~ 16%

Scenario 1
Average FCF (2011, 2010, 2009) is $6688 million

  • Start at $6688 million FCF
  • Assume a 5-year growth rate in FCF of 6% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 6688
1 7089
2 7515
3 7966
4 8443
5 8950
Terminal Value 147499

The firm's future cash flows, discounted at a WACC of 6.43%, give a present value for the entire firm (Debt + Equity) of $141037 million. If the firm's fair value of debt is estimated at $28600 million, then the fair value of the firm's equity could be $112437 million. $112437 million / 2260 million outstanding shares is approximately $50 per share and a 20% margin of safety is $40/share.

Scenario 2
All else being equal,

  • Assume a 5-year growth rate in FCF of 6% per year, then 3% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year FCF $Millions
0 6688
1 7089
2 7515
3 7966
4 8443
5 8950
Terminal Value 276435
  • Present Value of the entire firm (Debt + Equity): $235445 million
  • Value of Equity: $206845 million or $92/share
  • 20% margin of safety is $74/share

Sources

Morningstar.com

Yahoo! Finance

The Coca Cola Company

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.