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Using a Value Line Report: Coca-Cola’s Strong Showing – July 27, 2012
The dotted line at the bottom of the Graph on Value Line’s recent report for Coca-Cola (KO – Free Coca-Cola Stock Report) shows a decided move higher since the early part of this year. That dotted line shows the share’s relative strength compared to the broader market. Thus, an increasing line shows that Coca-Cola stock has been outperforming.
Putting numbers to that outperformance is as simple as looking at the total return table to the right of the Graph. The soda giant’s shares have advanced almost 20% over the trailing year through June versus the market’s 4% or so fall. Looking over the trailing three and five year periods shows that the shares have been consistent outperformers—particularly over the trailing five-year period in which the stock advanced over 73%, compared to the broader market’s rise of just 19%.
While past performance is, as the legal disclaimers are always sure to remind us, no guarantee of future performance, Coca-Cola has a lot going for it. For example, as the Analyst Commentary points out, its efforts in emerging markets, particularly India, have been performing well of late. This is important since the beverage markets in developed economies are largely mature. Note that the undisputed cola champion derived about 60% of its revenues from overseas markets in 2011 (a fact highlighted in the Business Description).
That means that what many view as an American Icon, which it clearly is, is also a powerful world-wide brand that has a leg up on the competition when it comes to expansion. Not only does the company have name recognition, but it also has a material infrastructure already in place in many regions. Name recognition also gives the company an edge in hiring top talent from a region—not to mention the fact that Coca-Cola also brings the “best practices” from an industry leading organization to the table wherever it sets up shop.
The above facts are all positive indications for the future, but the foundation of that future is built on the company’s financials. The beverage titan shines here, as well. For example, the company’s debt load is about 1/3 of its capital structure (shown in the Capital Structure box), a reasonable level that should allow it to support any of its expansion plans. Moreover, as displayed in the Current Position box, it has almost $17 billion dollars of cash on hand—more than its total long-term debt. Moreover, its cash balance has increased in each of the periods shown. These facts are part of the reason why Value Line has awarded Coca-Cola its highest grade for Financial Strength, A++.
That A++ Financial Strength rating, found in the Ratings box, coupled with the statistically derived Price Stability score of 100 (also the highest possible), lead to a Safety Rank of 1 (Highest)—again, the best possible. (Safety Rank is displayed in the Ranks box at the top of each Value Line report.) A conservative investor could very comfortably own shares of Coca-Cola and not only sleep well at night, but also take a few restful naps during the day. Collecting the 2.6% dividend should make that nap even more enjoyable.
The company’s solid operating performance, as noted above, hasn’t gone unnoticed on Wall Street. The stock now carries a well above market P/E ratio, noted by its Relative P/E of 1.30, shown in the Top Label section that runs across the top of each report. While Coca-Cola has historically commanded an above market P/E, the relative P/E hasn’t been this high since 2003. While it is hard to declare the shares “cheap,” they appear fairly valued at this time.
Value Line’s Robert Greene anticipates share earnings advancing at an annualized rate of about 8% over the next three to five years (found in the Rates box). That translates to a 2007-2009 earnings projection in the area of $2.75. Three to five year projections are found to the right of the labels in the Statistical Array. This figure suggests annualized total returns of between 9% and 14% over that time frame (these statistics are found in the Projections box and include dividends).
Another positive sign, at least from an emotional point of view, is the recent two for one stock split. Stock splits are technically meaningless since the only result is a lower stock price (an investor’s ownership interest remains unchanged, as does the actual performance of the company), but investors take a positive view of such action because it makes buying shares cheaper for investors. In fact, this is the first stock split for Coca-Cola shares in quite some time and could indicate a potential tipping point in investor sentiment about the company.
Coca-Cola is not an appropriate investment for an aggressive investor, but it could easily provide a solid core holding for a conservative investor seeking income. If that description fits your style, it would be a mistake to not at least consider a position here.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.