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.

Valuecruncher Interactive Analysts Report For Coca-Cola ($KO)

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?

Comparison Analysis

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.

Summary

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).

Disclosure: no positions.

Previously Valuecruncher has looked at Coca-Cola ($KO).  With Nielson rating carbonated beverages a recession vulnerable category we thought it was time to have a look at PepsiCo ($PEP).  How does the current share price look?

Valuecruncher valuation model of $PEP with interactive assumptions

Valuecruncher produces a valuation of US$48.01 for $PEP. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 10.5% below the current share price of US$53.64.

Assumptions

• Revenue: Reuters aggregates 10 analysts covering $PEP and these analysts have mean estimates of 2008 and 2009 revenues of US$43.5 billion and US$46.7 billion respectively. For our analysis we have used US$43.0 billion in 2008, US$46.0 billion in 2009 and US$47.5 billion in 2010.
• Profitability: We have used an EBITDA margin of 20.0% in 2008 rising to 21.0% in 2010. Reuters has $PEP‘s EBITD margin at 20.8% last year and 22.0% over the last five-years.
• Capital Expenditure: We have assumed capital expenditures of US$2.5 billion per annum moving forward.
• Discount Rate: 9.0%.  Valuecruncher used a discount rate of 8% in our $KO valuation.  We believe a discount rate in the 8-9% range is reasonable.
• Terminal Growth Rate: 3.0%.

Our analysis incorporates the cash and debt the $PEP balance sheet – Valuecruncher calculates a net debt number.

Play with our assumptions – what does your analysis say?

Disclosure: None

The Coca-Cola Company (KO) is trading at the bottom of their 52-week range (US$49.44-65.59). Typically KO has been one of the world’s most admired stocks. Warren Buffett’s Berkshire Hathaway is the second largest holder of KO stock with a US$10.4 billion investment in the company. Analysts are however beginning to move away from the stock.

At Valuecruncher we decided to put some numbers around KO using our on-line valuation tool.

KO Valuation

KO grew revenues from US$21.7 billion in 2004 to US$28.9 billion in 2007 – a 9.9% compound annual growth rate. Our assumptions of revenues for the next three years are US$33.15 billion in 2008 growing to US$36.65 billion in 2010 – an 8.3% compound annual growth rate. We have projected EBITDA margins to be 29% in 2008 then flat at 30% to 2010. We have used a terminal growth rate of 3.25%. We calculated this terminal growth rate based on year three (2009-10) growth of 4.1% dropping to a 3.0% stable growth rate by year 10. We used a terminal capital expenditure number of US$1.75 billion. We have used a WACC (discount rate) of 8.0%.

Valuecruncher valuation model of KO with interactive assumptions

Our analysis incorporates the cash and debt on the KO balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of US$54.73 per share which is 5% above the current share price of US$52.07.

One of Warren Buffett’s famous quotes is “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. At US$52.07 a share – in our view KO fits that criteria. Play with our assumptions – what does your analysis say?

Valuecruncher has a database of over 1,000 companies on major international exchanges. You can explore, create and share valuations for any of these companies.