Is This Beverage Stock a Good Buy?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Coca-Cola (NYSE: KO) is hoping to report better results for the second quarter of 2013 after starting the year off poorly during Q1. According to the company’s 10-Q, revenue was down only slightly, but with very little absolute change in costs operating income fell by 4%. That’s hardly a dramatic decline, but with Coca-Cola currently trading at 21 times trailing earnings the valuation is pricing in moderate to high growth in the business. Looking at the company’s geographic segments, there were small declines in sales in North America, the Pacific region, and Europe. Coca-Cola generated about $480 million in cash flow from operations during the quarter, which is roughly the same amount of cash used on capital expenditures; share buybacks were financed with debt issuances. However, CFO was held back by a large increase in working capital.

Coca-Cola is of course a classic defensive stock, with little change in demand for soft drinks through the business cycle. As a result, its beta is 0.3. The dividend yield, at 2.8% at current prices, is likely not high enough for a pure income investor to get involved but certainly serves as a plus for defensive investors. Wall Street analysts project that earnings per share will increase considerably in 2014, but the forward P/E of 17 still looks high to us; so in value terms, particularly with business struggling rather than growing, it doesn’t look like a buy at this time.

We, Insider Monkey, track quarterly 13F filings from hundreds of hedge funds and other notable investors as part of our work researching investment strategies. Warren Buffett is known as a fan of Coca-Cola, and his Berkshire Hathaway reported a position of 400 million shares in its most recent 13F (though we think it’s safe to day the holding company still owns most of those shares). Find Warren Buffett's favorite stocks. The Bill and Melinda Gates Foundation Trust disclosed ownership of about 34 million shares (see more stocks the trust owns).

Comparing the company to its peers

The closest peers for Coca-Cola are Pepsico (NYSE: PEP) and Dr. Pepper Snapple (NYSE: DPS). Pepsi’s trailing and forward earnings multiples are identical to those at Coca-Cola, and interestingly its beta and dividend yield match its rival’s as well. In addition, Pepsi has also been somewhat struggling recently: its last quarterly report recorded a very small rise in revenue compared to the first quarter of 2012, with earnings down slightly; this isn’t much different from what we saw at Coca-Cola either. Dr. Pepper Snapple, while it doesn’t share the brand power of these two companies, carries a significant discount in earnings terms, with a trailing P/E of 16. It has been experiencing growth, albeit only modest growth, so its cheaper valuation is interesting. In addition, Dr. Pepper Snapple boasts a beta of 0 and a slightly higher yield than either Coca-Cola or Pepsico.

Let's also compare the company to Monster Beverage (NASDAQ: MNST) and SodaStream (NASDAQ: SODA). Growth expectations are high with these two stocks, with trailing earnings multiples of more than 30 in each case. Monster is down 18% in the last year, and its net income has skidded a similar amount despite higher sales. The sell-side believes this will reverse, but the forward P/E is still 24, and given the recent results it seems like it might be a short target if anything. SodaStream is quite popular with short sellers, as 38% of the float is held short, but at least for now it has been delivering double-digit growth rates on both top and bottom lines compared to a year ago. Market expectations are certainly high, but it may be worth watching for further results in case its products turn out to be sustainable sources of business as opposed to a fad.

Conclusion

Coca-Cola (and Pepsi) don’t seem to be good value stocks right now, given their premium valuation both on an absolute basis and relative to Dr. Pepper Snapple. With that stock also featuring more attractive defensive characteristics, we think that it is a better place to start looking as an investment in the soft drink industry.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends Coca-Cola, Monster Beverage, PepsiCo, and SodaStream. The Motley Fool owns shares of Monster Beverage, PepsiCo, and SodaStream. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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