Coca-Cola ($KO) is an interesting company to look at from a business-cycle and valuation perspective. $KO is currently trading toward the top of their 52-week range at US$49.04.
The key comparator is PepsiCo ($PEP). You can change the generated peer companies on the site.
So what do we think?
Discounted Cash Flow Valuation
We have completed a discounted cash flow valuation using our interactive tools (there is a “discounted cash flow analysis” link just under the company name on the company page). We have populated our model with a mixture of consensus analyst estimates and Valuecruncher estimates. Our analysis produces a valuation of US$51.86 for $KO – 4.9% above the current share price. We see $KO broadly correctly valued at the moment. But how about compared to a peer group?
I am going to look at two of the metrics we use at Valuecruncher – Enterprise Value (EV)/Revenue and EV/EBITDA. Enterprise Value (EV) is simply market capitalization plus net debt [long-term borrowings less cash]. We use EV to capture the impact of debt and cash on a company’s balance sheet – market capitalization doesn’t capture different capital structures when comparing companies. That is less important in this case as $KO and $PEP have broadly similar capital structures.
EV/Revenue shows how a dollar of revenues is being valued by the market against the comparator set. On an EV/Revenue basis $KO is trading at 3.7x ($KO is being valued at 3.7x last year’s revenues). This compares to $PEP at 2.2x. $KO’s profit margins (at the EBITDA line) are 31.4% of revenues – against 20.7% at $PEP. A dollar of $KO revenues is being valued at 170% of a dollar of $PEP revenues – this is broadly in-line with the difference in profit margins in the business. This is what we would expect.
EV/EBITDA shows how a dollar of profit (measured in as Earnings Before Interest Taxes Depreciation and Amortization) is being valued by the market against the comparator set. On an EV/EBITDA basis $KO is trading at 11.9x ($KO is being valued at 11.9x last year’s profit at the EBITDA line). $PEP is trading at 10.6x. This difference will represent the different profit margins and growth prospects between the two businesses. There is a difference – but it isn't material. Again this is what we would expect. Nothing in the comparator analysis looks out of line – and thus a buying opportunity.
Based on our DCF valuation – $KO looks correctly valued. Looking at some comparators – the market is valuing $KO in line with the key peer company ($PEP).