Stock of the Day - February 3, 2009 - KO

The Coca-Cola Company (KO)

1886: Drink Coca-Cola. 1939: Coca-Cola has the taste thirst goes for. 1979: Have a Coke and a smile. 2009: Open Happiness. Since the beverage-makers inception in 1886, The Coca-Cola Company (KO) has grown and evolved dramatically. Now, the American originated thirst quencher reaches over 200 countries and doles out 1.5 billion servings a day. Even with the company’s long-term success, the shock taken by the markets in late 2008 has left Coke undervalued. KO is resting at a bargain price, just waiting to be scooped up.

Coca-Cola was trading around $55 to $60 in the beginning of 2008. In October the stock took a dive to $41.50 as a result of general investor fear of the markets. Coke has since bounced back from that price and has most recently traded at $43.32. Follow my reasoning as I explain why the steep drop in price was unwarranted, and why I believe the company will rebound back to the upper $50s.

Coke has been, and will be successful because it has managed to do what very few companies have succeeded in doing. The company has stayed the same, while rapidly expanding and innovating. More specifically, the Coca-Cola brand still maintains a massive amount of power because of the stability of its original beverage and gains strength as it acquires new brands.

Even while Coke still dominates the market share of nonalcoholic sparkling beverages, the company has expanded internationally and currently owns 2,800 distinct drinks. KO owns Minute Made, Vitamin Water, Dasani, Powerade, Sprite, and the list goes on and on, and constantly grows. But Coke doesn’t just grow, it grows effectively. Coke currently has a Return on Equity of 27.76%. This number indicates that the capital it spends with intentions of expansion is succeeding.

Can the 25% drop in Coca-Cola’s stock price in late 2008 be attributed to any internal negative factors? I haven’t found any. Do external macroeconomic support the fall? I don’t believe so. Take the words of CEO, Muhtar Kent, who recently stated that Coke is “at least crisis resistant.” Consumers are still eating and drinking. And when they do drink, they enjoy KO’s brands. Additionally, lowered oil, freight, and other commodity costs have recently reduced Coke’s costs. Day in and day out The Coca-Cola Company will still make cash. Kent struck a soft spot with me when he said that his goal is to “execute flawlessly… and to remain strong when we come out of the recession.”

KO’s 4^th Quarter Earnings Report for 2008 will be reported on February 12^th. The average analyst estimate for the quarter is higher than the last quarter of 2007. Additionally, analysts estimate that Coke will have an Earnings Per Share of $3.12 for the year as a whole. This would be a 15% year over year increase from an EPS of $2.70 in 2007. Coca-Cola’s earnings report should be a refreshing relief from the disconcerting reports that have been all too common lately.

Finally, it must be noted that Coke rewards its investors with a dividend payout of $1.52, resulting in a healthy yield of 3.6%. The dividend percentage is defensible because of the company’s steady cash flow.

The American company that has become a staple in consumer culture deserves to become a staple in your portfolio. The Coca-Cola Company remains rock solid in a time of economic hardship and can be expected to flourish when the markets rebound. This undervalued blue chip is simply waiting for the right time to jump.

 

-Matt Schwartz

College Trillionaire