There’s a reason Warren Buffett loves Coca-Cola, and it’s not just for their soft drinks, although he loves them too. This is a company that has a solid company, solid growth, a strong brand and good management. These are all things that Buffett likes. But what he likes even more is that this stock is still undervalued.
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Global Brand Power of Coca-Cola
In spite of its size, Coca-Cola still has great growth prospects around the world. They are the most recognized brand in the world. Their products are in the high rises of New York and Tokyo to the villages of Kenya and Indonesia. They are a volume business. As the world population grows and as the number of middle class consumers grows, people will be drinking more Coke. It’s simple math.
Here is Warren Buffett talking to Coca-Cola CEO Muhtar Kent about his large investment in Coke and how he used to buy six-packs for a quarter and sell them for a nickel each as a kid.
Growth and Dividends
Now let’s talk numbers. They are a $158 billion company. Being a large cap stock, one of the benefits is that they offer a dividend. So while you wait for long term growth, you are getting an additional 3% return in the form of dividends a year.
As far as growth goes, they are looking good. Their 5 year revenue growth rate is 14%. Their 5 year EPS growth rate is 11.29%. Those are impressive numbers for such a big company.
Although their net profit margins fell last year, it’s still fairly good. It dropped from 40.56% to 24.58% last year. But those are still good margins. But their sales grew by 32.53% in that time as well. If they are able to keep this sales growth track and improve on their margins, they will be in really good shape.
Sageworks, a financial analysis company, has done a valuation based on discounted cash flows on Coca-Cola. According to this analysis based on projected cash flows, it seems like they are undervalued beyond a margin of safety. The discounted cash flow method of valuation is one of the most objective ways to value a business because it is purely based on the earning potential of a company, which is what they exist to do at the end of the day.
Coca-Cola has a fairly strong balance sheet as well. Their debts are low. Their debt to equity ratio is 1.53, which is lower than the beverage industry’s average of 2.5. Their interest coverage ratio, which measures their ability to service debt, is also high at 32.90. The industry average is 4.
Remember that investing is a very risky activity. You can lose all or most of your initial investments. Consult a licensed financial advisor before implementing any investment strategy. Historical performance is no guarantee of future performance. No one can accurately predict the future, at least not consistently over time. The writer of this article and owner of this website do not own any of the stocks mentioned in this post.