The Biggest And The Best
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Coca-Cola Company (NYSE: KO) is generally regarded as one of the safest, smartest investments in the market, and for good reason. With an ever-increasing dividend, a great balance sheet, share buybacks, and a steady increase in share price, Coca-Cola has been a rock-solid investment for its shareholders. Even though Coca Cola has been in business since 1886, the company still manages to grow its revenue at an impressive pace, from $19.6 billion in 2002 to $46.5 billion last year, a 137% increase during the past decade alone!
With the company set to report earnings, I don’t foresee any major surprises. However, there are a few questions investors have, such as how the company plans to grow going forward, and what impact the acquisition of Coca Cola Enterprises’ (NYSE: CCE) North American operations has had.
Pretty much everyone knows that Coca Cola is the world leader in soft drinks. What some investors don’t realize is that Coca Cola is also the world’s largest producer of juices and juice-related products under brand names such as Minute Maid. Coca-Cola derives 44% of its revenues from North America, with the rest coming from Europe (10.3%), Asia (11.7%), Latin America (9.5%), and Africa (5.8%). The rest of the company’s income comes from the company’s investments in their bottling operations around the world.
Acquisitions and Growth Strategy
The cornerstone of Coca-Cola’s growth strategy recently has been through acquisitions. Notable acquisitions include the 2007 purchase of Glaceau (Vitamin Water) for $4.1 billion, several brands in Denmark and Finland in 2008, and its 2011 acquisition of Great Plains and Honest Tea.
Also, as I mentioned before, in October 2010, the company acquired the North American bottling operations from Coca Cola Enterprises for about $12.3 million. The company also sold its bottling operations in Norway and Sweden to CCE at the same time. This additional operation accounts for most of the giant jump in revenue from 2010-2011, from $35.1 billion to $46.5 billion, as well as the increase in Coca Cola’s long term debt from $5 billion in 2009 to $14 billion the next year.
Coca Cola Enterprises is now the third largest independent bottler in the world, focusing on European markets. I would be cautious on investing in Coca Cola Enterprises, at least until the economic climate in Europe improves. Additionally, the stock has shot up about 20% since November, so I would wait for a pullback before even considering it.
Coca Cola also actively enters into currency options and exchange contracts to minimize the risk of currency fluctuations on their bottom line. With the majority of the company’s growth potential overseas, this is a very prudent move.
Valuation, Competition, and the Dividend
Coca Cola currently trades toward the low end of its historical range at 18.5 times earnings, at a premium to some other companies due to their perception as a rock-solid company. When the company reports earnings next Tuesday, the consensus estimates call for $2.00 per share, which is expected to rise to $2.17 and $2.37 in 2013 and 2014, respectively, for expected annual growth of 8.5% and 9.2%.
Generally, I like to see a P/E ratio of no more than twice the earnings growth, and Coca Cola is right on the borderline. However, the company warrants a higher valuation due to its dominant position in its industry as well as for its excellent balance sheet.
Coca Cola also pays a nice dividend yield of 2.75% and has an excellent history of raising the payout (see below – the raise is almost perfectly linear). I would actually be very surprised if we did not see an additional increase for 2013.
The only real rival, in terms of size and resources is PepsiCo (NYSE: PEP), which appears to be a bit less attractive than Coke on a valuation basis at 19.5 times TTM earnings, and a similar growth rate. Additionally, I would place more value on Coke because of its dominant market share. Pepsi also has a less favorable balance sheet, with $4.4 billion in cash and $20.6 billion in long-term debt. Don’t get me wrong; I like Pepsi as a company. I just think Coke is the better choice right now.
As long as this upcoming earnings announcement and call doesn’t reveal any crazy surprises, Coca Cola should remain a nearly bulletproof investment for years to come. Great buybacks and clockwork-like dividend raises are the holy grail of income investing, and Coke succeeds admirably in both of those categories.
KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. 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!