What You Need to Know About KO

Coca-Cola (KO) stock climbed 0.6 % this afternoon. According to our metrics, the company seems fairly valued at today's prices. In the below analysis, we will put Coca-Cola's valuation in the context of its strong growth indicators and mixed market sentiment, which are also strong drivers for share price.

The Coca-Cola Company, a beverage company, manufactures, markets, and sells various nonalcoholic beverages worldwide. The large-cap Consumer Staples company is based in Atlanta, United States and has 82,500 full time employees.

KO's P/E Ratio Is Comparable to its Sector Average

Compared to the Consumer Staples sector's average of 24.36, Coca-Cola has a trailing twelve month price to earnings (P/E) ratio of 26.5 and an expected P/E ratio of 21.6. P/E ratios are calculated by dividing the company's share price by either its trailing 12 month ($2.29) or forward earnings per share ($2.81).

Earnings is another term for the net profits left over after subtracting cost of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Coca-Cola's P/E ratio is near its sector average of 24.36, we can deduce that the market is fairly valuing the company's earnings.

Coca-Cola Is Overvalued in Terms of Expected Growth

Coca-Cola's PEG ratio is 3.86. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Coca-Cola's case, it tells us the company is overvalued.

KO Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Coca-Cola's P/B ratio of 10.39 is higher than its sector average of 4.29, such a margin of safety does not exist for the stock.

Investors Stand to Gain from KO's Cash Flows

Coca-Cola has strong cash flows. With a coefficient of variability of 13.6% and an average growth rate of 3.2%, the company is effectively turning its revenue into cash. We calculate Coca-Cola's free cash flows by subtracting capital expenditures (long term investments in the business) from its total cash flows from operations. The table below shows us that capital expenditures are evolving at a -7.8% rate, versus 1.3% for operating expenses:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cashflow ($ k) YoY Growth (%)
2022-12-31 11,018,000 -1,484,000 9,534,000 -15.31
2021-12-31 12,625,000 -1,367,000 11,258,000 29.9
2020-12-31 9,844,000 -1,177,000 8,667,000 2.97
2019-12-31 10,471,000 -2,054,000 8,417,000 n/a

Coca-Cola's Margins Are Strong

If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Coca-Cola's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.

Coca-Cola's Gross Margins

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2022-12-31 43,004,000 18,000,000 58.14 -3.53
2021-12-31 38,655,000 15,357,000 60.27 1.62
2020-12-31 33,014,000 13,433,000 59.31 -2.4
2019-12-31 37,266,000 14,619,000 60.77 n/a

Coca-Cola's Operating Margins

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2022-12-31 43,004,000 14,095,000 25.37 -4.87
2021-12-31 38,655,000 12,990,000 26.67 -2.13
2020-12-31 33,014,000 10,584,000 27.25 0.7
2019-12-31 37,266,000 12,561,000 27.06 n/a

Coca-Cola's cost of revenue is growing at a rate of 5.3% in contrast to 2.9% for operating expenses. Sales revenues, on the other hand, have experienced a 3.6% growth rate. As a result, the average gross margins growth is -1.1 and the average operating margins growth rate is -1.6, with coefficients of variability of 1.9% and 3.2% respectively.

We See Mixed Market Signals Regarding KO

Coca-Cola has an average rating of buy and target prices ranging from $75.0 to $63.0. At its current price of $60.58, the company is trading -13.23% away from its target price of $69.82. 0.4% of the company's shares are linked to short positions, and 72.1% of the shares are owned by institutional investors.

Date Reported Holder Percentage Shares Value
2023-03-31 Berkshire Hathaway, Inc 9% 400,000,000 $24,232,000,732
2023-03-31 Vanguard Group, Inc. (The) 9% 370,070,163 $22,418,851,152
2023-03-31 Blackrock Inc. 7% 311,541,271 $18,873,170,767
2023-03-31 State Street Corporation 4% 169,618,154 $10,275,468,079
2023-03-31 FMR, LLC 2% 79,672,040 $4,826,532,329
2023-03-31 Morgan Stanley 2% 78,696,341 $4,767,424,481
2023-03-31 Geode Capital Management, LLC 2% 76,982,020 $4,663,570,912
2023-03-31 JP Morgan Chase & Company 2% 74,631,655 $4,521,185,796
2023-03-31 Charles Schwab Investment Management, Inc. 1% 60,636,577 $3,673,363,945
2023-03-31 Wellington Management Group, LLP 1% 54,928,649 $3,327,577,656
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.