Drink Brand Strategy - DOC

							        Louis Wilson Fund - Equity Research
             ]April 15, 2010          Analyst: David Dale & Tye Menist




                        Coca-Cola Company
                            (NYSE-KO)

PRICE: $55.02          52 Week Range: $42.00 - 59.45               S&P 500: 1,197.30

                         LWF Company Rationale
      We are rating the Coca-Cola Company (KO) a buy. At a current price of $55.02,
      Coca-Cola is selling at a price that is below our intrinsic value calculation of $63. A
      company rated as highly as KO (A++) is easily seen as a company that would meet
      the LWF requirements for financial stability. Coca-Cola is a very large corporation
      with a market capitalization of $126.23B. Coca-Cola is the world’s most widely
      recognized soft drink brand with a market share of 22%. (Datamonitor)

     Company Characteristics that meet the LWF Strategy:
      Coca-Cola meets the Wilson Fund Strategy because of its strong financial rating of
      A++ and its strong brand image. Coke has been named the most valuable brand in
      the world for several years by Interbrand (Morningstar). Coca-Cola also fits the
      LWF strategy because it is a business that is easy to understand. One major
      characteristic that meets the LWF strategy is the fact that Coca-Cola is
      undervalued at the moment at a price of $55.02. Coca-Cola’s strong management
      and even stronger franchise put it in line with the LWF strategy (LWF-Homepage).

     Business Summary:
      Coke is the largest distributor, manufacturer, and marketer of non-alcoholic drinks
      in the world. Coca-Cola is an Atlanta, Georgia based company that has a beverage
      portfolio of over 500 different brands (10-K). KO’s main operating segments are
      Eurasia and Africa, Europe, Latin America, North America, Pacific, Bottling
      Investments, and Corporate. KO employs approximately 92,500 people across the
      globe. KO also has ownership interests in beverage joint ventures and bottling
      operations, which are almost all independently owned and managed (10-K).

     Growth Strategy:
      Coca-Cola plans to saturate the international markets and gain brand equity as part
      of their growth strategy. We have calculated a revenue based growth rate of 4%
      annually based from our OUMA. This is comparable to value line’s estimation of a
      4.5% growth of sales. Additionally, Morningstar believes that “Despite its vast
      existing distribution network, we expect Coke to achieve long-term annual revenue
      growth of around 5% because per capita consumption is still increasing in many
      developing countries, and Coke has pricing power in most of its markets.”
      (Morningstar) The United States market has been relatively weak, but with the
      upturn in the economy appreciation is expected. Coca-Cola’s forecasted net profit
    margin of 25.7% is leading the industry. Morningstar expects Coca-Cola to
    “generate an average operating margin of almost 23% over our explicit 10-year
    forecast period.” (Morningstar)
   Management:
    Coca-Cola’s current President and CEO is Muhtar Kent. Kent joined the company is
    1978 an has held many different positions within the company such as marketing
    and operations roles. Kent is also the chairman of the board of directors, which is
    structinized by Morningstar because a separation between the board and
    management is perfered. Kent’s influenence in the boardroom has lead the way to
    key acquisitions that will greatly inhance the distribution of their products.
    Morningstar believes that “Coke has lacked flexibility in the past and has been slow
    on occasions to change course, but we think that Mr. Kent's ability to execute his
    strategy relatively quickly indicates that he has the support of Coke's board of
    directors”. Morningstar also writes that “Executive compensation is generous, but
    incentive-based pay does appear to be aligned with the long-term interests of
    shareholders. We applaud the firm for its adoption of majority voting, allowing
    shareholders to vote against the election of a director, but we think that allowing
    cumulative voting would further enhance the rights of the small shareholder.”




      Industry, Competitive, and Regulatory Factors
   Coca-Cola is currently “the world’s biggest brand and largest manufacturer of soft-
    drink concentrate and syrups…It enjoys a 50% share of the world’s carbonated soft
    drink market and 44% of the United States market”. (Merrill Lynch) DATAMONITOR
    provides a summary of the forecasted global market value, volume and
    segmentation of the soft drink industry:
        o Global Market Value is forecasted to reach $189.8 billion, an increase of
            5.4% since 1998
        o Global Market Volume is forecasted to reach 200.1 billion liters, an
            increase of 10.6% since 1998
        o The United States accounts for 58.1% of the market’s value.

   Coca-Cola holds operations in more than 200 countries worldwide and six major
    business segments. The following list each segment and the percent of total
    revenues for year 2008. United States (25.7%), Eurasia and Africa (6.7%), Europe
    (15%), Latin America (11.3%), Pacific (13.6%), and Bottling Investments. Coca-
    Cola’s American business segments consist of the United States, Canada, Puerto
    Rico, the Virgin Islands, and the Cayman Islands. iii

   The Economic moat for Coca-Cola extends both deep and wide because they have
    such a strong brand name that can be noticed by nearly anyone in the world.
    Warren Buffet may consider Coca-Cola an “economic castle” that is protected by
    an extremely large moat around it. Coca-Cola’s accumulation of its intangible
    assets has helped them expand this moat since 1919. Coca-Cola’s efficient
    distribution operations have allowed the brand to saturate almost every corner of
    the world. According to Morningstar.com, “The extensive direct distribution
    network that enables Coca-Cola to deliver its products to almost all corners of the
    globe is the source of the firm's wide moat.” (Morningstar)

   Two of the top competitors in the soft drink industry are Coca-Cola and Pepsi. Both
    companies have been forced to evaluate their prices, promotions, products, and
    places of operations. Reports from 2008 conclude that Coca-Cola accounts for
    22.6% of the global soft drink market’s volume, and Pepsi ranks second with 13.7%.i

   The Soft drink industry has expected growth rates of 3.0 to 3.6% in years 2008 to
    20013. From 2008 to 2013, the industry expected to see an increase from 386.8
    billion in 2008 to 456.3 billion in 2013. Overall, the industry is expected to grow
    nearly 18% from 2008 to 2013. i




                                Global Soft drink Industry

       Year        2008        2009        2010        2011        2012        2013
     Revenues      386.8       400.1       414.3       429.4       442.4       456.3
     (billions)
         %         3.4%        3.4%        3.6%        3.6%        3.0%        3.1%
      Growth
                                  Source: DATAMONITOR


   Below is a comparison of each company’s Growth Rates for five years and Profit
    Margins.
             Company               Sales Growth Rate            Profit Margin
         Coca-Cola (KO)                     9%                         23.5%
          PepsiCo (PEP)                     11%                        13.9%



   With Coca-Cola very expansive portfolio, the company is able reach the needs of all
    types of customers ranging from first world countries such as the United States to
    third world countries such as parts of Africa. Their customers include large
    international chains of retailers and restaurants and independent business.

   Regulatory and legal Factor facing Coca-Cola consist of the “legal requirements
    that have been enacted in various jurisdictions in the United States and overseas
    requiring that deposits or eco-taxes or fees be charged with the sale, marketing,
    and use of certain non-renewable beverage containers.” (10-K) With increased
    consumer awareness and changing attitudes about environmental responsibility,
    such legal requirements could be made more frequent.
                                     Risk
   Morningstar believes that Coca-Cola’s “sales and profitability could be negatively
    affected beyond our forecasts by greater-than-expected increases in commodity
    prices, particularly for raw materials such as sugar, cocoa, and oranges.” Increases
    in any of these commodities could have a direct impact on how Coca-Cola prices
    their products.

   There are many factors that can contribute the rising operating cost of Coca-Cola.
    Some of these factors include: interruption in supply, shortage of ingredients,
    natural disasters, political uncertainty, and overall instability of the global
    economy.

   Consumer’s concerns over the health affects of Coca-Cola’s products have been
    increasing with the obesity epidemic of the United States. Consumers are being
    encouraged to reduce sugar intake as well as non-sugar sweeteners, which could
    directly impact the sales of many of Coca-Cola’s products.

   Coca-Cola owns and operates many businesses in many different countries. The
    company uses over seventy-one currencies in addition to the US dollar. With over
    74% of operating revenues coming from outside of the United States, it is important
    to consider the effects of currency fluctuations. Increases and decreases in
    currency valuations can affect operating revenues for the company. Because of the
    vast diversity of Coca-Cola’s operations, fluctuations could be offset by the
    diversification of currencies used. (10-K)

   The governmental instability along with economic concerns can decrease
    consumer’s confidence in deposable income, which in turn decrease the demand
    for their products. Unstable conditions in the Middle East have impacted
    international business because of the boundaries placed on not only product
    placement, but also product promotion. (10-K)




                                 Valuation
   Using an estimated P/E value of 22, and expected Earning per Share of $3.54, and a
    dividend of $2.12, our calculated intrinsic value of KO is $63 per share. Based on
    our OUMA calculations, EPS will increase at a rate of 7.9% annually. This is slightly
    more than Value lines estimate of 5.5%
   Coca-Cola’s price to earnings ratio is currently 18.5, about average for the
    industry. Value Line forecast that post Coca-Cola and Pepsi’s P/E ratios
    will increase within the next year. Price to Book value for Coca-Cola is
    currently 5.7, below Pepsi’s 6.5. Price to sales ratio for Coca-Cola is 4.5,
    compared to Pepsi’s 2.4. According to Morningstar, the current industry
    average is 2.0.Coca-Cola yielded 3.24% in dividends, slightly higher than
    the industry’s 3.0% as well as S & P’s 1.8%. Coca-Cola is currently
    trading at $55.02 with a 52 week range of $42.00-$59.45. By using the
    OUMA model, we have valued Coke at a $63 intrinsic value. The
    recommended buy is at $44 and the recommended sell at $82.
                            Future Analysis
Key assumptions we made while analyzing Coca-Cola has many opportunities based on
their strong brand name and efficient distribution process which will lead to steady
growth throughout the future.
                       Stock Performance Graph (last 5 years)

          The Coca-Cola Company (KO)



    Open: High: Low:


    Previous Close:




    http://ir.thecoca-colacompany.com/phoenix.zhtml?c=94566&p=irol-stockchart
                                             Bibliography

Coca-Cola 10-K. www.sec.gov/archives

Datamonitor. The Coca-Cola Company. Company Profile. July 16, 2009

Datamonitor. Global Carbonated Soft Drinks. Industry Profile. August 2009

Merrill Lynch Equity Overview: KO – Coca-Cola (A-1-7)

Morningstar. Quicktake Report.
Http://quicktake.morningstar.com/stocknet/printreport.aspx?country=usa&symbol=KO


Value Line. KO. January 29, 2010