Value Analysis of Coca-Cola Every Investor Should Read

Shares of Coca-Cola (KO) jumped 0.8 % during today's morning session, bringing their 52 week performance to -4.0%. The stock seems to be overvalued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account the company's strong growth indicators and mixed market sentiment.

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 25.2 and an expected P/E ratio of 23.4. P/E ratios are calculated by dividing the company's share price by either its trailing 12 month ($2.41) or forward earnings per share ($2.6).

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 4.2. 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 10.1 is higher than its sector average of 4.29, such a margin of safety does not exist for the stock.

KO's Weak Cash Flow Generation Is Troubling

The table below shows that Coca-Cola is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in Coca-Cola's case, free cash flow is growing at an average rate of 0.0% with a coefficient of variability of 26953641439.7%. We can also see that cash flows from operations are evolving at a 0.0% rate, versus 0.0%:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2023-02-21 11,018,000 -1,409,000 12,427,000 -10.49
2022-02-22 12,625,000 -1,259,000 13,884,000 28.18
2021-02-25 9,844,000 -988,000 10,832,000 -6.19
2020-02-24 10,471,000 -1,076,000 11,547,000 29.35
2019-02-21 7,627,000 -1,300,000 8,927,000 5.01
2018-02-23 6,930,000 -1,571,000 8,501,000

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 (%)
2023-02-21 43,004,000 -18,000,000 57 -5.0
2022-02-22 38,655,000 -15,357,000 60 1.69
2021-02-25 33,014,000 -13,433,000 59 -3.28
2020-02-24 37,266,000 -14,619,000 61 -1.61
2019-02-21 34,300,000 -13,067,000 62 -1.59
2018-02-23 35,410,000 -13,255,000 63

Coca-Cola's Operating Margins

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2023-02-21 43,004,000 -14,095,000 25 -7.41
2022-02-22 38,655,000 -12,990,000 27 0.0
2021-02-25 33,014,000 -10,584,000 27 0.0
2020-02-24 37,266,000 -12,561,000 27 0.0
2019-02-21 34,300,000 -12,081,000 27 28.57
2018-02-23 35,410,000 -14,556,000 21

Coca-Cola's cost of revenue is growing at a rate of -0.0% in contrast to 4.2% for operating expenses. Sales revenues, on the other hand, have experienced a 0.0% growth rate. As a result, the average gross margins growth is 0.3 and the average operating margins growth rate is 3.2, with coefficients of variability of 3.6% and 9.4% respectively.

We See Mixed Market Signals Regarding KO

Coca-Cola has an average rating of buy and target prices ranging from $70.07 to $58.08. At its current price of $60.77, the company is trading -5.8% away from its target price of $64.51. 0.5% of the company's shares are linked to short positions, and 71.5% of the shares are owned by institutional investors.

Date Reported Holder Percentage Shares Value
2023-06-30 Berkshire Hathaway, Inc 9% 400,000,000 $24,308,000,183
2023-06-30 Vanguard Group Inc 9% 369,884,918 $22,477,906,636
2023-06-30 Blackrock Inc. 7% 302,588,568 $18,388,307,415
2023-06-30 State Street Corporation 4% 171,246,926 $10,406,675,771
2023-06-30 Geode Capital Management, LLC 2% 79,165,884 $4,810,910,806
2023-06-30 JP Morgan Chase & Company 2% 78,941,015 $4,797,245,517
2023-06-30 Morgan Stanley 2% 78,497,937 $4,770,319,667
2023-06-30 FMR, LLC 2% 74,442,533 $4,523,872,764
2023-06-30 Charles Schwab Investment Management, Inc. 1% 60,674,352 $3,687,180,398
2022-12-31 Norges Bank Investment Management 1% 46,176,945 $2,806,172,968
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.