Is Coca-Cola Still a Safe Investment?

With shares of The Coca-Cola Company (NYSE:KO) trading at around $40.17, 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:

C = Catalyst for the Stock’s Movement

Coca-Cola is one of the most well-known brand names throughout the world. Its products are sold in over 200 countries. Coca-Cola has several brands, including Diet Coke, Coca-Cola Zero, Minute Maid, Powerade, Dasani, and Full Throttle.

Coca-Cola is facing two headwinds at the moment, which include weakened consumer spending and the media spreading fear about health concerns for sparkling beverages. What the media almost always fails to mention is that these health concerns are to be taken seriously if sparkling beverages are consumed in excess. Drinking sparkling beverages in moderation should have no ill health effects, especially if other sugar consumption is limited throughout the day. It also helps if the consumer is active.

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Positives for Coca-Cola outweigh negatives. They include:

  • Operating margin growth
  • Easing of currency headwinds
  • Steady profits
  • Consistent revenue growth
  • Top-tier brand
  • Superb cash flow
  • International growth potential
  • Consistent dividend increases

The chart below compares fundamentals for Coca-Cola, Pepsico (NYSE:PEP), and Dr. Pepper Snapple Group (NYSE:DPS). Coca-Cola has a market cap of $179.07 billion, Pepsi has a market cap of $121.77, and Dr. Snapple has a market cap of $9.44 billion.

KO

PEP

DPS

Trailing   P/E

20.40

20.12

15.67

Forward   P/E

17.24

16.55

13.97

Profit   Margin

18.78%

9.43%

10.49%

ROE

27.92%

28.70%

27.69%

Operating   Cash Flow

 $10.64 Billion

$8.48 Billion

$458.00 Million

Dividend   Yield

2.80%

2.70%

3.20%

Short   Position

0.90%

0.90%

3.10%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Coca-Cola is weaker than the industry average of 0.60, but it still qualifies as normal. It’s also stronger than the debt-to-equity ratios for Pepsi and Dr. Pepper.

Debt-To-Equity

Cash

Long-Term Debt

KO

0.98

$16.56 Billion

$32.62 Billion

PEP

1.27

$6.62 Billion

$28.36 Billion

DPS

1.23

$377.00 Million

$2.80 Billion

 

T = Technicals Are Strong  

Those interested in attempting to determine a better option between Coca-Cola and Pepsi will be wasting their time. As the numbers below indicate, the stocks tend to cross paths. However, over the long haul, these stocks trade together. They’re both winners.

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1 Month

Year-To-Date

1 Year

3 Year

KO

4.55%

11.62%

11.97%

58.37%

PEP

3.99%

16.21%

22.25%

30.78%

DPS

6.62%

5.66%

18.06%

43.08%

 

At $40.17, Coca-Cola is trading above all its averages.

50-Day   SMA

38.51

100-Day   SMA

37.81

200-Day   SMA

38.10

 

E = Earnings Have Been Steady          

Revenue has consistently improved on an annual basis. It might seem as though earnings have been inconsistent, but when 2010 is removed, earnings have also consistently improved on an annual basis.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

31.94

30.99

35.12

46.54

48.02

Diluted   EPS ($)

1.25

1.47

2.53

1.85

1.97

 

When we look at the last quarter on a year-over-year basis, we see improvements in revenue and earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

11.04

11.14

13.08

12.34

11.46

Diluted   EPS ($)

0.36

0.45

0.61

0.50

0.42

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

This is simply a matter of a slowdown in the domestic market versus significant growth potential in the international market.

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Conclusion

Coca-Cola will never again see growth like it did in the 1980s and 1990s, but is has become one of the safer investments throughout the broader market. There are headwinds at the moment, but fundamentals remain strong.

Coca-Cola is an OUTPERFORM.

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.