Coca-Cola: Hard To Swallow At Today's Valuation

For Value Investors – Coke is Not It

History says... Risk Outweighs Potential Reward

How long can a company skate by on reputation alone before its stock’s valuation reflects reality? The fact that Berkshire Hathaway (BRK-A,BRK-B) and Warren Buffett (TradesPortfolio) hold on to their massive Coca-Cola (KO) position gives comfort to others.

Clearly, Coke is a favorite topic here on GuruFocus based on the number of articles written about it. KO is not going to disappear any time soon and it pays a decent dividend. Do those positive factors outweigh the company’s unexciting fundamentals and pricey valuation?

You make the call.

Management has already pre-announced that 2014 and year-ahead EPS will each only be around $2.04, excluding foreign currency translation losses. Earnings were $2.08 in 2013 and $1.92 as far back as 2011.

If the company’s own projections come true, then cumulative 4-year growth during 2012 – 2015 would total 6.25%, or 1.47% annualized. What P/E would that level of growth command if this were not KO? Just asking.

Regular readers of my columns know I always want to determine what a company’s normalized metrics look like historically rather than deciding what I think a stock should sell for.

Coke’s average P/E during the years 2008 through 2014 was 18.0x. Its average yield over that same stretch was 2.96%.

Buyers in early 2008 paid as high as $32.80, or almost 22x forward earnings to own the iconic name. The yield at that lofty price was a sub-par (for Coke) 2.32%. That didn’t wortk out too well.

About two and a half years later those momentum chasers were just where they started.

Of course, people were quick to forgive KO, blaming the poor stock performance on the Crash of 2008 and The Great Recession.

Fair enough.

But Coke addicts who plunged in more recently, at $43.40 in May of 2013, are still slightly underwater almost two years of a bull market later. Did I mention that they bought in at too high a valuation? KO’s 2013 peak came at 20.9x that year’s final profits while sporting a below average 2.58% dividend.

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Disclosure: None.

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