Is Coca-Cola Still the Real Thing?

Tony Sagami

Coca-Cola (KO) is one of the world's most-recognized brands. Soda drinkers all over the globe world consume millions of bottles of Coke every single day.

Coca-Cola has a whopping 42% market share of the carbonated soft drink market in the U.S., with Pepsi (PEP) a distant second at 28%.

As a longer-term investment, Coca-Cola has been fantastic. If your grandfather had bought one — just one — share of Coca-Cola in 1919 and passed it on to you in his will, that single share would be worth more than $10 million today.

Of course, none of us can go back to 1919 and retroactively buy Coca-Cola shares. We just have to look at the here and now to figure out whether it is worth buying today.

Coca-Cola reported Q4 results last week and the picture wasn't so pretty. On a year-over-year basis, quarterly profits shrank 8.4% to $1.71 billion, or 38 cents per share.

Now, $1.71 billion is a ton of profits. However, it is down from $1.86 billion, or 41 cents per share, in the same quarter of 2012.

The problem is slumping sales. Revenues for the quarter fell 3.6% to $11.04 billion.

Coca-Cola faces two problems:

Problem #1: Consumers in developed countries are increasingly health-conscious and drinking fewer sugary, calorie-laden soft drinks. Quarterly sales fell by 1% in North America.

It doesn't help when politicians try to legislate personal behavior -- like the New York City cap on soda portions, or a new proposal in California to require labels warning that soda causes diabetes and tooth decay.

Don't underestimate the impact of finger-wagging politicians. Overall soda sales in New York City fell 6.8% in 2013.

Problem #2: Sales in some parts of the world are growing quite well. Drink volume in the Eurasia/Africa region was up by 6% and by 4% in the Pacific region.

That vast international exposure, once considered a strength, is now negatively affecting profits because the U.S. dollar has been strengthening. Coca-Cola itself estimates that profits will fall 7% in 2014 just because of currency headwinds.

But as the above chart shows, Coca-Cola sales have been stagnant for the last three years and show no signs of a turnaround in 2014.

Coca-Cola is trading at roughly 19 times trailing earnings. High P/E ratios don't bother me as long as sales and profits are growing, but I think 19 times earnings for a company growing at a snail's pace is expensive.

Coca-Cola's PEG or price-earnings-to-growth ratio is sky high at 3.38. A PEG number below 1.0 means you are getting a ton of growth bang for your investment buck. Anything over 2.0 is much too expensive, in my view.

Coca-Cola has a fantastic brand name, extremely stable cash flows, and pays a $1.12 annual dividend. That works out to a yield just under 3%, but even that attractive dividend is losing its luster.

I say this because U.S. Treasury yields have been rising and now pay a higher yield than Coca-Cola.

Income investors, who have been buying high-dividend stocks instead of bonds, may soon realize that 10-year Treasury bonds pay higher income … and do so with less volatility.

I usually point out attractive opportunities in this column, but Coca-Cola is a stock that I'd avoid.

In fact, if I owned it ... I'd sell it. Today.

Best wishes,
Tony Sagami

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Posted 02-25-2014 12:37 PM by Tony Sagami