Saturday Oct 23, 2021

Coca-Cola: a stock of value?

There has been a lot of talk lately about Coca-Cola and its potential as a value stock, as it now detects a 2.6% dividend yield (which is the highest dividend yield since the late 1980s) and a P / E or less than 21. right at the bottom of your five-year low. Plus, the current price of roughly $ 43 a share is also near the end of its nine-year range (nine years ago, Coke’s last former great CEO Roberto Goizueta was still at the helm of the company). Sure, Coke has had its own problems, but it’s a great company, they would say, and heck, Warren Buffett owns Coke stock too.

Do not misunderstand. I really like Coke as a company. Their brand is as American as possible, yet more than 70% of all their sales come from outside of North America. The country with the highest per capita consumption of Coca-Cola is Mexico. According to, the Coca-Cola brand is worth approximately $ 67 billion and is the number one brand in the world. Who could forget the famous statement by the Coke patriarch, Robert Woodruff? When the United States made the decision to enter World War II, it put its hand to its heart and declared that it would “see to it that every man in uniform receives a bottle of Coca-Cola for a nickel wherever he is and whatever the cost. “. . “Of course, it didn’t hurt that Woodruff’s friend, General Dwight Eisenhower, was also a great Coca-Cola promoter. When the war ended, hundreds of thousands of fighting men and women became Coca-Cola fans because of him. rest of their lives.

Under the leadership of Goizueta, Don Keough, and Doug Ivester, Coca-Cola emerged as a must-see and growing stock during the late 1980s and into the mid-to-late 1990s. Keough was the great motivational speaker, while that Goizueta was unmatched in his ability to “manage” the stock price and the Wall Street analysts who covered the soft drink industry and Coca-Cola. Goizueta had a habit of observing the price of Coca-Cola shares intraday on a computer at Coca-Cola headquarters. When Warren Buffett was buying Coca-Cola stock in 1988, he and Keough found out by observing the trading action and tracing those purchases back to an Omaha-based broker. Ivester, a former accountant, could have been considered a great financial alchemist. Under Ivester’s financial leadership, Coca-Cola purchased many of its bottlers and named the entity Coca-Cola Enterprises. The bottler went public in November 1986.

When Coca-Cola Enterprises (CCE) went public, Coca-Cola (the company) owned 49% of its outstanding shares. Because of this, Coca-Cola had the ability to increase syrup prices at will (the previous agreement mandated that Coca-Cola only adjust its price to match the inflation of its syrup in the North American market), thus reducing profit margins. from the bottler. but increasing your own income and profits. The coup de grace was this: Due to the fact that Coca-Cola only owned 49% of CCE, it did not have to consolidate any of its financial statements with CCE. At the time, not a single analyst fully understood this relationship. Year after year, the company delivered. Goizueta carefully (personally) handled all the information that came out of Coca-Cola. He would personally call Wall Street analysts. Any analyst who dared to question it openly or disagreed with Coca-Cola’s earnings projections would be rejected. One such analyst was Merrill Lynch’s Allan Kaplan, who at one point wrote a note to his clients noting that Coca-Cola may depend on Japan for a large chunk of its profits. When Goizueta learned of the note, he angrily responded with letters to both Kaplan and his bosses at Merrill Lynch. Kaplan was banned from attending analyst meetings at Coca-Cola for more than a year. From that moment on, analysts knew they shouldn’t mess with Goizueta and Coca-Cola.

Keough officially retired in 1993, while Goizueta passed away in October 1997, succumbing to lung cancer. Ivester was successful as CEO, but behind the scenes, the company was in disarray. Keough and Ivester loyalists clashed, with the former group bearing the brunt of the hardships. The current CEO, Neville Isdell (who was loyal to Keough and the only true competitor for the top job at the time) was sent into “exile” to Britain to run a bottler. According to a recent Fortune article, “The big problem [with Ivester]Yet it was his tin ear. Ivester had a high IQ, but a very low IQ. A stubborn, very shy and self-taught son of North Georgia mill workers, he had gotten where he was through intelligence and hard work. He resented Keough’s grandeur, say people who knew him well, and he never fully appreciated the importance of Goizueta’s almost daily conversations with directors. (Ivester declined to comment.) Before long, with his head down and full blast in a turbulent market, Ivester had distanced himself from European regulators, executives at large clients such as Wal-Mart and Disney, and some large bottlers, including Coca-Cola Enterprises (in whose seated together was Warren Buffett’s son, Howard). As he ran to put out fires, he became increasingly isolated from his own board of directors. A person was keeping in contact with them, however, even in retirement, Don Keough. “

In December 1999, Ivester stepped down as CEO, after board members Warren Buffett and Herbert Allen told him they had lost confidence in his leadership. If anything, the next CEO, Doug Daft, fared even worse than Ivester. Daft, an Australian who ran Coke’s Japanese operations, had no idea of ​​the culture of Atlanta. In a kind of retaliation for Ivester’s dealings with Keough’s loyalists, he also caused many of Ivester’s favorite executives to leave the company. He also looked for quick fixes, for example trying to boost Coca-Cola’s profitability simply by downsizing. In May of last year, Daft stepped down as CEO and Neville Isdell, a longtime Keough favorite, came out of retirement to run Coca-Cola.

Described as “charismatic,” Isdell may be the best man for the job, but it’s still too early to see what he can do at this stage to reinvigorate the brand. Under the leadership of the trio of Goizueta, Keough, and Ivester in the 1980s and much of the 1990s, Coca-Cola stock was a must and Coca-Cola was seen as a growth stock. However, also note that the KO streak during that time also came amid the largest bull market in US stock market history.

Once again, readers should remember that I have always argued that we are still in a secular bear market, a bear market similar to the secular bear market of 1966 to 1974. Whereas indices such as the Dow Industrials, Transportation, S&P 400, and S&P 600 have rallied very well from the bottom of the cyclical bear market in October 2002, the big caps like Coca-Cola, Microsoft or even GE have never really hedged, and it is I think the large caps will continue to underperform once the bassist will reassert itself sometime this year. The 2.6% dividend yield may or may not help, but who would want to own a “value stock” once the federal funds rate is greater than your dividend yield (at this time, the federal funds rate is 2.5%)? I don’t really see deep value here. While a P / E of 20 is at the lower end of its five-year range, it is interesting to note that Warren Buffett began buying his Coca-Cola stock in 1988 when the P / E was only 13 (with a capitalization market share of less than $ 15 billion), and analysts at the time were proclaiming that the stock was expensive! Currently, S&P projects a fair value of Coca-Cola at $ 46, so there really isn’t a large margin of safety here.

While I think Coca-Cola is a very strong brand and should be in the long-term top positions of all investors, I don’t think it’s a good time to buy right now. The growth in KO’s stock price was not due to luck or coincidence, it was due to Goizueta’s astute stock price management, Keough’s skill as a company salesperson, and financial genius. of Ivester, coupled with a roaring bull market more than anything else. Despite the lack of leadership at Coca-Cola for the past seven years, part of the old dream of KO being a growth stock has still held, for far too long. For KO to become an attractive stock again, this author will need to see a more compelling valuation, such as a stock price of $ 25 to $ 30 per share. At some point, though, I think KO may be a glamorous stock once again (as it still has a lot of potential in China and India, where only around 850 million boxes of finished Coca-Cola products were shipped in 2004, compared to 20 billion boxes for the whole world), but not until some of the weak hands have been taken out of the bag.

Let us know your thoughts and opinions. KO is buy, hold or sell?

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