Is Coca-Cola (KO) price for value, investment, or speculation?

Charlie Munger, Warren Buffet’s longtime business partner, on Coca-Cola recently:

Coke today vs. past: Coca-Cola (NYSE: KO  ) is not as good today as it used to be. It’s just so big. Like Berkshire, it’s hard to make the elephant move very fast.

But it’s still one of our favorites. The trouble with selling an expensive product is that it gives people the incentive to knock you off. Coke isn’t like that. Branded companies that sell cheap products, and lots of them, is a fantastic business model to have.

Here is the rest of the article:

Is Coca-Cola (KO) priced for value at $68.53 per share?  Here is my first look at Coke.

Coca-Cola (KO)

Market price: $68.53 per share

Shares: 2.29 billion shares

Market capitalization: $156.88 billion

Dividend record:  This company is a solid dividend grower for at least the last decade.

Dividend: $0.47 quarterly

Dividend yield: 2.75%  ($1.88 annual dividend/$68.53 share price)

2010 EPS: $5.17

Dividend payout ratio:   36.3%  ($1.88/$5.17), but its usually closer to 72%  ($1.88/$2.58 average EPS over five year excluding the extra $6 billion in other income during 2010)

Earning power: $2.58 average EPS @ 2.29 billion shares ($3.10 if extra income in 2010 is included)

(Earnings adjusted for changes in capitalization; Coke has been buying back shares)

            EPS       Net inc.             Adj. EPS

2006     $2.16    $5,080 M           $2.22

2007     $2.57    $5,981 M           $2.61

2008     $2.49    $5,807 M           $2.54

2009     $2.93    $6,824 M           $2.98

2010     $5.06    $11,809 M         $5.16 (+$6 billion in other income)

2010                 $5,809 M           $2.54 (excluding the extraordinary income)

Five year average earnings excluding extraordinary income in 2010 equals $2.58 per share

Value price territory below 12x average earnings = $30.96

Speculative price territory above 20x average earnings = $51.60

Coca-Cola priced at 26.5 times average earnings (market price $68.53 per share)  This is speculative.

Balance sheet: Coke has a nice looking balance sheet; however, I’d like to see better current and quick ratios.


Book value per share: $13.83

Price to book value: 4.95 (bad)

Current ratio: 1.07 (greater than 2.0 is good)

Quick ratio: 0.77 (greater than 1.0 is good)

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Published in: on July 6, 2011 at 5:42 pm  Leave a Comment  

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