Is Coca-Cola a Healthy Investment?

With shares of Coca-Cola (NYSE:KO) trading around $40, is KO an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Coca-Cola is a beverage company that engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. Its sparkling beverages include carbonated energy drinks, carbonated waters, and flavored waters. The company’s still beverages comprise non-alcoholic beverages like non-carbonated waters, flavored and enhanced waters, non-carbonated energy drinks, juices and juice drinks, ready-to-drink teas and coffees, and sports drinks. Coca-Cola Co. sells its products under the Coca-Cola, Diet Coke, Coca-Cola Light, Coca-Cola Zero, Sprite, Fanta, Minute Maid, Powerade, Aquarius, Dasani, Glacéau Vitaminwater, Georgia, Simply, Del Valle, Ayataka, and I Lohas brand names.

David Winters of Wintergreen Advisers said recently that Warren Buffett is planning to take The Coca-Cola Company private in a leveraged buyout, but Buffett denies it. Buffett told CNBC, that there’s “absolutely no chance of that.” Winters has apparently sent letters to The Coca-Cola Company shareholders, as well as the company’s board and Buffett himself. He criticized the soda maker’s equity plan for this year, which he believes will “significantly erode” the company’s stock price. Winters also said he thinks Buffett will do something similar to what he did with H.J. Heinz Company to Coca-Cola. In that case, he conducted a leveraged buyout and took Heinz private. Buffett’s firm Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) owned approximately 9 percent of The Coca-Cola Company as of the end of last month. That amounts to 400 million shares.

CNBC’s Becky Quick said as soon as she heard David Winters’s comments about The Coca-Cola Company and Buffett, she immediately called up the Oracle of Omaha to ask him about it. She said her initial reaction was that it was crazy and that Buffett actually asked her to repeat herself, possibly suggesting that he thought it was crazy too. CNBC anchors pointed out that Coca-Cola shares are quite expensive and that it would take a lot of capital to do a leveraged buyout of the soft drink maker. Winters has been locked in battle with The Coca-Cola Company’s management, expressing his disgust regarding the stock payout the soft drink maker is planning for certain employees. The plan was included in Coca-Cola’s recent proxy, and Winters launched a proxy battle, although he didn’t win. Warren Buffett has said that he was also opposed to the stock payout plan, but he separated himself from Winters, saying that he likes The Coca-Cola Company’s management. With Winters’ recent comments, it seems like he hasn’t given up his battle.

T = Technicals on the Stock Chart are Strong

Coca-Cola stock has seen its fair share of volatility over the last couple of years. However, the stock is currently surging higher and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Coca-Cola is trading above its rising key averages which signal neutral to bullish price action in the near-term.

KO

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Coca-Cola options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Coca-Cola options

13.07%

56%

54%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Coca-Cola’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Coca-Cola look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-7.69%

-7.32%

8%

-3.28%

Revenue Growth (Y-O-Y)

-4.16%

-3.62%

-2.51%

-2.57%

Earnings Reaction

3.74%

-0.98%

-0.65%

-1.9%

Coca-Cola has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Coca-Cola’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Coca-Cola stock done relative to its peers, Pepsi (NYSE:PEP), Dr Pepper Snapple (NYSE:DPS), Monster Beverage (NASDAQ:MNST), and sector?

Coca-Cola

Pepsi

Dr Pepper Snapple

Monster Beverage

Sector

Year-to-Date Return

-1.02%

5.11%

19.15%

2.94%

7.54%

Coca-Cola has been a poor relative performer, year-to-date.

Conclusion

Coca-Cola is an iconic company that provides beverage products through its recognized brands to consumers and companies in just about every country worldwide. David Winters of Wintergreen Advisers said recently that Warren Buffett is planning to take The Coca-Cola Company private in a leveraged buyout, but Buffett denies it. The stock has seen its fair share of volatility over the last couple of years, but is currently surging higher. Over the last four quarters, earnings and revenues have been decreasing, which has produced conflicting feelings among investors. Relative to its peers and sector, Coca-Cola has been a weak year-to-date performer. WAIT AND SEE what Coca-Cola does this quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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