Share happiness, not just Coke stock
Tuesday, January 27th, 2014
January 2015 has been rather frightening for investors, but I do believe it will be a prosperous year, so I thought it would be a good time to look at the large, well-known company Coca-Cola.
Coca-Cola, which trades on the New York Stock Exchange under the ticker KO, has a very large market cap of $191 billion. During the last year, shares have traded as high as $45 each and as low as $36.89. The stock currently trades from $43 to $44 a share.
Based on the current share price, investors receive a good-size dividend with a yield of 2.9 percent.
Looking at the valuation ratios, the stock does not show as much of a value for investors. With a price-earnings ratio of 23.95 over the last 12 months -- slightly above the industry average of 22.6 -- it doesn't give me a lot of comfort on what one is paying for the earnings of this great company.
Price-to-sales also is no bargain, coming in at 4.1, which is higher than the industry average of 2.9. The company has accumulated a lot of intangible assets over the years, and that is evident by comparison of the price to tangible book value versus the price to book value.
The current price to book value is reasonable at 5.7 times based on the company’s most recent financial information, but when compared with the price to tangible book value of 29.2, nearly 6 times that of the book value, it should cause investors a little bit of concern.
The company uses 65 percent of its earnings to pay out the 2.9 percent dividend. For a company this large and that well-established, it is not unusual to be using 65 percent of its earnings to pay out a dividend.
What concerns me is that year-over-year sales declined 2.3 percent while the industry average was slightly better, up 0.25 percent. The earnings for Coca-Cola were also down 6.7 percent year-over-year when the industry reflected earnings-per-share growth of a half of 1 percent.
I was disappointed at the strength of this company’s balance sheet for a couple of reasons: It is a very old company, and Warren Buffett holds it in his portfolio -- he is not one who likes a lot of debt on a balance sheet.
With that said, the company has a debt-to-equity rating of 125 percent, well above the industry average of 80 percent. Sometimes I feel okay with a company having a higher debt if it has a high current ratio; however, I still don't like that above-115 percent debt-to-equity.
Coca-Cola does not look good with the current ratio of 1.1, which is the same as the industry average. What this means is that the company has just enough in current assets that could come due within one year and be liquidated to pay off the next 12 months of the companies liabilities.
Not a bad situation, but not a great situation with such a high debt-to-equity.
The company has a nice return on equity of 24.5 percent, which is below the industry average of 26.90 percent but still a very respectable 20 percent-plus. The net profit margin for Coca-Cola is very attractive at 17.5 percent, which means that for every dollar it brings in, it keeps nearly 18 cents.
The 17.5 percent is well above the industry average of 12.7 percent.
Looking at the efficiency of the company during the last 12 months, Coca-Cola has turned over the receivables 9.1 times, which is better than the industry average of 8.2 times. A little disappointing is the inventory turnover of 5.4 times during the last 12 months, which is below the industry average of 6.6 times.
The company has not reported earnings for the fourth quarter of 2014; investors will see those numbers Feb. 10. So working with current data going out to December 2015, it is disappointing to see the earnings-per-share estimate of 24 analysts falls from $2.04 to $2.03 for the year ending December 2015.
I would hope to see some earnings-per-share improvement by 2016 for this company.
Using the 40-year average of the forward PE of 16.5 reveals a future target sell price of $33.50 per share, well below current levels. It is also worth noting that 90 days ago, the earnings-per-share estimate was $2.11 for the year ending December 2015. That 8-cent decline does not give me a whole lot of comfort for the earnings estimates of 2016.
For investors looking for a safe haven for their money, I would not recommend Coca-Cola as a company that can provide a decent return with a high amount of safety.
Do you have a question or a company you'd like me to take a look at? Email me at Brent@WilseyAssetManagement.com!
Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.
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