Is Coca-Cola Ready to Outperform?

With shares of The Coca-Cola Company (NYSE:KO) trading around $36.89, is KO an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

E = Equity to Debt Ratio is Close to Zero

Coca-Cola’s debt-to-equity ratio of 0.99 looks pretty good when compared against its major competitors. We also need to consider total debt and total cash on hand, which for Coca-Cola is $32.74 billion in debt, and $18.08 billion in cash.

This compares to Pepsico, Inc. (NYSE:PEP), which has a debt-to-equity ratio of 1.30 with $27.94 in total debt and $5.71 billion in cash. Smaller soda-industry player Dr Pepper Snapple Group, Inc. (NYSE:DPS) has a debt-to-equity ratio of 1.19, with $2.77 billion in debt and $395 million in cash.

T = Technicals on the Stock Chart are Good

As of December 18, the stock price was 0.50 percent below its 20-day simple moving average, or SMA; 0.19 percent above its 50-day SMA; and 0.34 percent above its 200-day SMA.

Since the beginning of 2012 the stock price has been in an upward trend, rising 6.30 percent this year to date and 10.67 percent year over year.

As a benchmark, the S&P 500 has risen 13.29 percent year to date, and has 20.03 percent year over year.

For comparison, Pepsico has climbed 6.22 percent this year to date, and 9.57 percent year over year, while shares of Dr Pepper Snapple Group have climbed 16.56 percent this year to date, and 15.99 percent year over year.

E = Excellent Mediocre Performance Relative to PeersCoca Cola

Many investors favor return on equity as a key metric to diagnose how well a company is performing. On this metric, the top soft-drink companies all fall very close to each other. Coca-Cola has an ROE of 26.52 percent, beating out Pepsico, which has an ROE of 26.19 percent, but coming in below Dr Pepper Snapple, which has an ROE of 27.33 percent.

Operating margins are also critical for stock evaluation. On this metric, Coca-Cola smokes its competition with a margin of 22.38 percent, which compares to Pepsico at 13.92 percent, and Dr Pepper Snapple at 17.93 percent.

T = Trends Support the Industry in which the Company Operates

According to Coca-Cola’s 2011 Annual Review, the global average per-capita consumption of Coca-Cola beverages was 92 servings (based on an 8 U.S. fluid ounce serving). In the United States, the average was 403 servings per year; in Mexico, it was 728.

Significantly, in developing economies like India and China, the average consumption was low, 12 and 38 respectively. Coca-Cola is well aware of its opportunity for growth in these regions. The company has committed over $30 billion over five years for growth, much of which is in emerging economies. This includes $2 billion in India over five years, and $4 billion in China of three years. Russia, the Middle East, and North Africa will also see billions in investment.

For Coca-Cola, the brand is everything. Interbrand once again ranked Coca-Cola as the most valuable brand in the world, estimated to be worth over $77 billion dollars and growing.

But it’s not all good news for the world’s most popular soft drink…

Coca ChristmasThe soda industry in the United States has seen opposition in the face of mounting health concerns. In September, the New York City Board of Health approved a ban on the sale of large sodas from restaurants, street carts, and movie theaters, setting an unfavorable precedence for a debate that is likely to be long and arduous.

That debate focuses around the relative un-healthiness of Coca-Cola’s product (or, soda in general), and what amounts to the freedom of choice. A 25-ounce soda may be unhealthy, but choosing our own vices is a prized American pastime. While the analogy is not perfect, there are some parallels to be drawn here between the debate over the health risks of soda and what has happened in the cigarette industry recently.

That being said, reports indicate that half of Americans drink soda every day, to say nothing of the veritable armada of other beverage products that Coca-Cola offers.

Conclusion

With an annual dividend yield of 2.70 percent, Coca-Cola has been a favorite pick for dividend investors. The company’s stock is remarkably stable (a beta of just 0.38), and while share price growth has suffered over the past few months, it has a long history of growth.

Analysts see about 15 percent growth potential for the stock, according to the mean target of 13 brokers, but consensus on whether Coca-Cola is a “Buy” or “Hold” is fairly split. This is because what it comes down to is investing style. Coca-Cola is safe, but there are companies with better growth potential out there.

Because of this, and the metrics above, Coca-Cola is a long-term OUTPERFORM within its industry, but it’s important to keep in mind that the stock’s growth is currently lagging behind the S&P benchmark.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.