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Coca cola - lost it's bubbles?

Analysing companies' finances and value from their financial statements using ratios and formulae
TheMotorcycleBoy
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Coca cola - lost it's bubbles?

#272735

Postby TheMotorcycleBoy » December 21st, 2019, 11:39 am

Hi folks,

After mentioning this stock (NYSE:KO) over in the US Shares thread I decided to take a look at the last 6 years worth of operating numbers. I must admit that although my earlier obsession with focussing almost exclusively on the ONs, was somewhat flawed, and that one also needs to temper this approach with a qualitative view on the sector, and the company's history and goverance. Indeed I was definitely caught out recently by buying A.G. Barr (BAG) too soon after their profit warning, and prior to doing more research.

However for my way of working, I think it's still better to look at the numbers first, and then focus on news, market sentiment and the company overview in more depth. I'm certainly glad I did that with Coca-cola since otherwise I would have probably burnt a lot of unnecessary time googling and reading various analyst/pundit write ups, since whilst I might missed something (please shout out if so) I did not find their numbers that impressive.


It's easy to spot that revenue has dropped every year since 2013. Earnings and EBIT have taken a similar fall, excepting from 2017 -> 2018 which presumably is mainly down to Trump's tax cuts.


Presumably the dividend growth of 7% against FCFps decline of 5%, means that the dividend has been funded by debt - possibly emphasised by a growing net debt metric?

All in all the numbers above are screaming at me, not to buy this share, and don't to spend any more time on research. Just for a hoot I'm sharing the DCF and EPV valuations my spreadsheet kicks out:

Of DCF analysis is pretty pointless in this case, since it assumes the FCFps is actually growing. But hey.

DCF initial growth 0.020 final 0.020 terminal 0.020 discounted  @ 0.0891 | 22.14
DCF initial growth 0.030 final 0.025 terminal 0.020 discounted @ 0.0891 | 23.48
DCF initial growth 0.020 final 0.020 terminal 0.020 discounted @ 0.0771 | 24.82
DCF initial growth 0.030 final 0.025 terminal 0.020 discounted @ 0.0771 | 26.36
DCF initial growth 0.020 final 0.020 terminal 0.020 discounted @ 0.0721 | 27.20
DCF initial growth 0.030 final 0.025 terminal 0.020 discounted @ 0.0721 | 28.92

Earnings power value, if any of these techniques are actually realistic, would be appropriate since it assumes it models all profit being extracted for the owners' benefit and stay-in-business CAPEX, and none for reinvestment in growth.

EPV @ 0.0891 | 17.90
EPV @ 0.0771 | 20.61
EPV @ 0.0721 | 22.00

Matt

(EDIT: the Stock price figures are in $, the main analyis ones are mostly $M)

TheMotorcycleBoy
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Re: Coca cola - lost it's bubbles?

#272736

Postby TheMotorcycleBoy » December 21st, 2019, 11:49 am

simoan wrote:
TheMotorcycleBoy wrote:Wow.

Has anyone mentioned Coca cola (NYSE:KO) on this thread yet? Isn't that one of Buffett's faves? I don't own any but it's certainly on my radar to research and run the numbers.

I see it's running, according to google https://www.google.com/search?q=coca+co ... 8&oe=utf-8 at about 30x earnings, which just at my topmost buying range. But perhaps it's worth a punt.

Any opinions on this one, people?

Matt

I don't know where you got that earnings multiple from? My data tells me the forward P/E is a smidge over 24 based on forecast 2020 EPS of $2.26 USD. I don't have a view on Coke because I already own PepsiCo which is slightly cheaper at 23x 2020 EPS.

All the best, Si

Hi Si,

I double checked by working out a guess at the TTM P/E:

Q1 $0.38 (this from "continuing operations") https://d1io3yog0oux5.cloudfront.net/_6 ... in_967.pdf
Q2 $0.61 https://d1io3yog0oux5.cloudfront.net/_6 ... ond_11.pdf
Q3 $0.60 https://d1io3yog0oux5.cloudfront.net/_6 ... in_973.pdf
Q4 $0.62 I've just guessed this!!

Using the published SP from "today" $54.97. So I therefore estimate: 24.9x earnings guessed so far.

I stand corrected! :lol:

Matt

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Re: Coca cola - lost it's bubbles?

#272746

Postby monabri » December 21st, 2019, 12:20 pm

The 2017 net income figure ($1283m) sticks out. I see that the ROCE/OM% figures subsequently increase. Perhaps it was due to the strategy discussed here (Article 8 Nov 2017)

https://www.coca-colacompany.com/news/b ... l-partners

I also see "Goodwill" creeping up.... (and it's not yet Christmas) and the FCFPS is reducing :(

Doesn't the gross gearing figures imply that debt is increasing?

My general feeling is that the KO price has been buoyed by the US Market in general. It's difficult buying these "foreign" stocks as we don't tend to track them in the papers to the same extent as say BP/Shell/ULVR.

I'd give it some time to see if the improvements continue (especially divi cover).

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Re: Coca cola - lost it's bubbles?

#272749

Postby Dod101 » December 21st, 2019, 12:49 pm

I am very impressed by your analysis by numbers. My first step would be to take a look at the Annual Report for the last two or three years and I suppose you must have done to get these numbers but when I Google Coca Cola Annual Report I am told that the latest report (for 2018) 'has reached its limit for free report views' and that no hard copies are available.

Have you pinched all the free views?

Dod

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Re: Coca cola - lost it's bubbles?

#272752

Postby SalvorHardin » December 21st, 2019, 1:09 pm

Dod101 wrote:I am very impressed by your analysis by numbers. My first step would be to take a look at the Annual Report for the last two or three years and I suppose you must have done to get these numbers but when I Google Coca Cola Annual Report I am told that the latest report (for 2018) 'has reached its limit for free report views' and that no hard copies are available.

Have you pinched all the free views?

The site that comes top of the Google search is an aggregation website. American companies like to put their reports on third party sites like this. Try the Company's own investor relations website:

https://investors.coca-colacompany.com/ ... al-results

Go for the 10-K (the 14 megabyte "annual report" doesn't include the full accounts)

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Re: Coca cola - lost it's bubbles?

#272754

Postby Dod101 » December 21st, 2019, 1:16 pm

Thanks SH. As you can guess I know nothing about the US market or how the corporate governance business operates. I will certainly take a further and closer look.

Dod

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Re: Coca cola - lost it's bubbles?

#272788

Postby ADrunkenMarcus » December 21st, 2019, 5:06 pm

Thanks for sharing your detailed analysis with us.

It does have decent returns on capital but I think the growth is not really going to be there to the same extent in the future.

I think I'd prefer Pepsi to Coca Cola, but I don't hold either. I am a fan of American stocks - long term, I also think Sterling will continue its decline against the dollar. It was £1 to $4.86 in 1912 - now, I'd expect it to be closer to £1 / $1.10 if we get a 'bad Brexit'.

I do hold an alcoholic drinks company: Diageo. Brown-Forman would have been a buy, too, at a better price - I did look at it in 2014, but thought it was expensive. That was a mistake as it is still 'expensive' yet has grown steadily: moreover, in 2014 a £1 would have bought me $1.70 or so, so I'd have gained on the currency too.

Best wishes

Mark.

TheMotorcycleBoy
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Re: Coca cola - lost it's bubbles?

#272798

Postby TheMotorcycleBoy » December 21st, 2019, 6:17 pm

ADrunkenMarcus wrote:Thanks for sharing your detailed analysis with us.

It does have decent returns on capital but I think the growth is not really going to be there to the same extent in the future.

Hmm. However my spreadsheet gives one or two different interpretations/valuations for ROCE. Although both use the familiar

ROCE = EBIT/CapitalEmployed

we have several different views of what constitutes "Capital Employed". The classic one, I believe, I learnt of when I read Phil Oakley's "How to pick Quality shares" is

Total assets - Current Liabilities (+ optionally Short term debt)

and I used to apply solely this simple formula in my spreadsheet. But then upon reading other companies ARs from time to time I'd notice that they had their own ROCE figures (usually a little bit higher than mine!) and sometimes they would humour the reader by supplying their bespoke definitions. I can't recall exactly which firm it was, but I ended up acquirely a second alternate formula for Capital Employed which resulted in a second ROCE formula. (IIRC the firms which I'd seen the alt. definition for Capital Employed being TATE, SMWH (whsmith), SPX (spirax sarco)). The second CE formula I wound up with being:

+    Goodwill
+ Intangibles
+ Property, plant, equipment
+/- Working capital (Inventories + trade receivables - trade payables)
+ Lease costs
+ Current provisions
+ Non debt derivatives (i.e. currency + IR hedges)

Now what I'm at odds with re. KO is the big difference between the classic ROCE formula and one based on more discreet capital elements which I plagiarized:


By way of comparison, these are the two ROCE result sets for Nike (NYSE:NKE)


for which I see a reassuring level of parity.

In the case of KO, such discrepancies like this in the ROCE, plus the poor growth, lead me to believe, as monabri proposes: that Coke is currently overpriced in the market.

ADrunkenMarcus wrote:I think I'd prefer Pepsi to Coca Cola,

I've not looked at Pepsi yet. I do note though that when we visited KFC today, the kids wanted PepsiMax! So you never know... ;)

Matt

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Re: Coca cola - lost it's bubbles?

#272802

Postby swill453 » December 21st, 2019, 6:35 pm

TheMotorcycleBoy wrote:I've not looked at Pepsi yet. I do note though that when we visited KFC today, the kids wanted PepsiMax! So you never know... ;)

Is it not the case that Pepsi is more popular in the USA than Coke? Though Coke wins globally by far.

Scott.

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Re: Coca cola - lost it's bubbles?

#272843

Postby UncleEbenezer » December 22nd, 2019, 10:44 am

Hmmm. Not something I'd normally look at, but an idle Sunday morning in bed with a seasonal lurgy ...

That top line sales figure might explain why they were so keen to buy profitable-and-growing Costa - which didn't otherwise look like an obvious fit. Should bump that top line up a bit! Not sure when the terms of that were agreed, but I wonder if the 2018 current balance reflects money set aside for the purchase?

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Re: Coca cola - lost it's bubbles?

#272855

Postby AsleepInYorkshire » December 22nd, 2019, 12:18 pm

I don't want to ignore all the numbers as they do seem to show a downward trend.

However, if I recall correctly during the late 80's Coca Cola was very much out of favour. But Warren Buffett didn't seem to feel that should deny him a chance to buy. I won't bore you with the details but most people felt at the time that WB was "off his proverbial head".

Iirc he currently owns 9% of Coca Cola. I believe his average purchase cost him $3.25. I think it's one of his largest holdings in his portfolio along with Bank of America and Wells Fargo. Buffett once said if you had $1bn you couldn't make a company as good as Coca Cola.

https://www.youtube.com/watch?v=0SVoDlDdBh4

AiYn'U

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Re: Coca cola - lost it's bubbles?

#273013

Postby TheMotorcycleBoy » December 23rd, 2019, 9:31 am

AsleepInYorkshire wrote:I don't want to ignore all the numbers as they do seem to show a downward trend.

However, if I recall correctly during the late 80's Coca Cola was very much out of favour. But Warren Buffett didn't seem to feel that should deny him a chance to buy. I won't bore you with the details but most people felt at the time that WB was "off his proverbial head".

Iirc he currently owns 9% of Coca Cola. I believe his average purchase cost him $3.25. I think it's one of his largest holdings in his portfolio along with Bank of America and Wells Fargo. Buffett once said if you had $1bn you couldn't make a company as good as Coca Cola.

https://www.youtube.com/watch?v=0SVoDlDdBh4

AiYn'U

I didn't watch the clip, but I still appreciate Buffet's sentiment. When I was a kid right through to my young adulthood (I probably stopped drinking the stuff after my student days) Coca-cola must've been the most iconic global brand along with Macdonalds, Levi jeans etc. Back in '87, me and my best mate spent a month Interrailing, including Norway in the north and Italy in the south and staying at several countries in between. We estimated affordability/cost of living of a country based on the price of a Coke can (IIRC 25p in the UK, and equivalent to £1 in Scandinavia at the time) such was it's universal appeal.

So I still can't understand what went wrong with KO's sales. On TLF I've even had AG Barr (BAG) (Irn-Bru) negatively compared to Coke, e.g.
westmoreland wrote:it's not a coca cola, nor is it growing quickly. as i said, i know it's a good company, because it's one that i considered investing in,

But now I'm not quite so sure.

Reading back on the AG Barr thread I note Salvor posted something about Coke taking a bashing in response to a new recipe, but I believe his quote relates to events in the '80s, so presumably isn't part of their decline in the 2010s which seemed to start in 2012.

Matt

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Re: Coca cola - lost it's bubbles?

#273149

Postby paulnumbers » December 23rd, 2019, 10:09 pm

As I’m sure you’re aware, Buffett is a large holder.

He’s mentioned before that you only need to look at one ratio with this company, which is (drum roll)

“Number of cases sold per share”

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Re: Coca cola - lost it's bubbles?

#273163

Postby TheMotorcycleBoy » December 24th, 2019, 7:07 am

paulnumbers wrote:As I’m sure you’re aware, Buffett is a large holder.

He’s mentioned before that you only need to look at one ratio with this company, which is (drum roll)

“Number of cases sold per share”

Sure but according to AiY:

I believe his average purchase cost him $3.25.

He will be receiving a massive earnings yield right now. I bet he's not buying them now, and probably hasn't done for a long while.

Whilst XYZ (highly esteemed investor) might hold a stock, it's certainly worthy of appraising that instrument, it certainly doesn't mean for me that I should copy for the sake of it.

I do definitely appreciate the brand appeal of KO - in fact that's what led me here! But I can't figure out the numbers. Why the sales drop in the 2010s?


Intriguingly the most recent TTM figures are showing a lift. Hmm.

Here's Pepsi's by way of comparison. We do have recent non growth years ('15 and '16). But the decline is no where near as profound.


So either brand or taste wise, KO have messed up in a way, not really as apparent in PEP.

Matt

References:
http://financials.morningstar.com/ratio ... &region=us
http://financials.morningstar.com/ratio ... &region=us

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Re: Coca cola - lost it's bubbles?

#273273

Postby paulnumbers » December 24th, 2019, 6:52 pm

TheMotorcycleBoy wrote:
paulnumbers wrote:As I’m sure you’re aware, Buffett is a large holder.

He’s mentioned before that you only need to look at one ratio with this company, which is (drum roll)

“Number of cases sold per share”

Sure but according to AiY:

I believe his average purchase cost him $3.25.

He will be receiving a massive earnings yield right now. I bet he's not buying them now, and probably hasn't done for a long while.

Whilst XYZ (highly esteemed investor) might hold a stock, it's certainly worthy of appraising that instrument, it certainly doesn't mean for me that I should copy for the sake of it.

I do definitely appreciate the brand appeal of KO - in fact that's what led me here! But I can't figure out the numbers. Why the sales drop in the 2010s?


Intriguingly the most recent TTM figures are showing a lift. Hmm.

Here's Pepsi's by way of comparison. We do have recent non growth years ('15 and '16). But the decline is no where near as profound.


So either brand or taste wise, KO have messed up in a way, not really as apparent in PEP.

Matt

References:
http://financials.morningstar.com/ratio ... &region=us
http://financials.morningstar.com/ratio ... &region=us


Hi,

It wasnt a recommendation to buy, it was a recommendation to consider the ratio buffet thinks is important for KO.

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Re: Coca cola - lost it's bubbles?

#273395

Postby TheMotorcycleBoy » December 26th, 2019, 8:16 am

paulnumbers wrote:Hi,

It wasnt a recommendation to buy, it was a recommendation to consider the ratio buffet thinks is important for KO.

No worries, Paul. I apologise if any earlier remark of mine came across as being at all bitchy. If so, it certainly was unintentional.

Just a shame KOs recent top line numbers aren't more impressive - then I reckon that I would have taken a leaf from WB's book.

Matt

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Re: Coca cola - lost it's bubbles?

#273401

Postby paulnumbers » December 26th, 2019, 10:30 am

TheMotorcycleBoy wrote:
paulnumbers wrote:Hi,

It wasnt a recommendation to buy, it was a recommendation to consider the ratio buffet thinks is important for KO.

No worries, Paul. I apologise if any earlier remark of mine came across as being at all bitchy. If so, it certainly was unintentional.

Just a shame KOs recent top line numbers aren't more impressive - then I reckon that I would have taken a leaf from WB's book.

Matt


No problem :)

I calculated the figures myself once (takes about 10 mins) and if I recall, they weren’t doing great recently on increasing the slabs of coke sold per / share. alas I forget the detail

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Re: Coca cola - lost it's bubbles?

#273410

Postby AsleepInYorkshire » December 26th, 2019, 11:29 am

Hmm ...

Here's a really stupid thought

And yes I'm exceptional at them :shock:

Why not consider buying 50% Coke and 50% Pepsi?

Sort of hedges the bet really doesn't it?

AiYn'U (Having stupid thoughts at Xmas 8-))

TheMotorcycleBoy
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Re: Coca cola - lost it's bubbles?

#273426

Postby TheMotorcycleBoy » December 26th, 2019, 12:58 pm

AsleepInYorkshire wrote:Hmm ...

Here's a really stupid thought

And yes I'm exceptional at them :shock:

Why not consider buying 50% Coke and 50% Pepsi?

Sort of hedges the bet really doesn't it?

AiYn'U (Having stupid thoughts at Xmas 8-))

:lol:

Have you been on the falling down water again?! Jack Daniels and Coke?

Matt

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Re: Coca cola - lost it's bubbles?

#273441

Postby AsleepInYorkshire » December 26th, 2019, 2:42 pm

TheMotorcycleBoy wrote:
AsleepInYorkshire wrote:Hmm ...

Here's a really stupid thought

And yes I'm exceptional at them :shock:

Why not consider buying 50% Coke and 50% Pepsi?

Sort of hedges the bet really doesn't it?

AiYn'U (Having stupid thoughts at Xmas 8-))

:lol:

Have you been on the falling down water again?! Jack Daniels and Coke?

Matt

Malt Whiskey - name I can't recall - terrible hangover :shock:
Suspect there should have been some coke in it :lol:
AiYn'U with Coke


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