Wednesday, February 19, 2014

The Long Case for the Coca-Cola Company

The Coca-Cola Company (KO) will be announcing earnings on Tuesday, so what better time than the present to get an update on its current valuation.  There's not much needed to be said about a company as great as Coca-Cola.  It has the number 1 and number 2 brands in terms of sales in Coca-Cola Classic and Diet Coke as well as a huge stable of other recognizable brands in Sprite, Powerade, Vitaminwater, Minute Maid and many more.  The Coca-Cola Company closed trading on Friday, February 14th at $38.93 giving a current yield of 2.88%.

DFC Valuation:

Analysts followed by Yahoo! Finance expect The Coca-Cola Company to grow earnings 5.55% per year for the next five years and I've assumed they can grow at 4.5% per year thereafter.  Running these numbers through a two-stage DCF analysis with a 9% discount rate yields a fair value price of $44.65.  This means the shares are trading at a 12.8% discount to the discounted cash flow analysis.

Graham Number:

The Graham Number valuation method was conceived of by Benjamin Graham, the father of value investing, and calculates the maximum price one should pay for a company given the earnings and book value.  The Coca-Cola Company earned $1.93 per share in the last twelve months and has a current book value per share of $7.28.  The Graham Number is calculated to be $17.78, suggesting that it is overvalued by 119.0%.

Click here to the read the rest of the analysis at Seeking Alpha.

I've updated my Stock Analysis page to reflect the most recent analysis.

6 comments:

  1. That Graham Number bit is kind of crazy to think of. I know next to nothing about this sort of analysis, but that seems to scream 'buy', no?

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    1. Done by Forty,

      Actually according the Graham Number the most you should pay for Coca-Cola is $17.78 but it's currently around $37 so it's quite overvalued. If you want to learn more about the stock valuation methods I use you can check out any of the full analyses (http://www.passive-income-pursuit.com/p/stock-analysis.html) or the stock valuation methods series I wrote about last year (http://www.passive-income-pursuit.com/search/label/stock%20valuation%20method).

      Thanks for stopping by!

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    2. It is interesting that you have decided to put content exclusively for Seeking Alpha, but not for your own site. While you are probably earning more in the short-term from that, in the long-run, Seeking Alpha can and probably will decide to affect your payouts, while keeping your content forever.

      I have posted on SA for 6 years, and can tell you that they do try to make major changes to the site that affect contributors at least once per year.

      Best Regards,

      Dividend Growth Investor

      PS You had a very nice write-up of Coca-Cola otherwise

      Delete
    3. DGI,

      I figured I'd give it a shot. Plus if SA makes changes that I don't like I can always start posting back here. I wanted to test the waters a bit to see what other options are out there. It's partly to increase current income as well as increase readers/viewers here through a larger audience. And if I don't like how things go I have 4 quarters each year to write up a new analysis and have it posted exclusively here.

      I'm glad you liked the KO analysis. What kind of changes have they made? Significantly reducing the payout per pageview or just not having your articles get linked properly for the exposure it should be getting? I'm curious to hear what the drawbacks are in your view.

      Thanks for stopping by!

      Delete
  2. I think coke is a steal at the moment. Bought it during the pullback in january to make up about 11% of my portfolio. Thats how positive I am on coke. Lets hope it continues to be the giant its been in the past.

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    Replies
    1. john,

      I don't know if it's a steal but I definitely think it's one of the better DG values out there. The markets in general aren't giving a whole lot of value and KO is one of the highest quality companies out there.

      Thanks for stopping by!

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