Coca-Cola Investment Analysis

Introduction

Coca-Cola’s earnings and growth are expected to remain positive. This is based on the quantitative and qualitative estimations by the chosen investment advisors, along with my own calculations. The investment advisors expect Coke’s operating income, net operating revenues, earnings per share, sales, and stock price to continue to increase. Based on my calculations, it is expected that Coke will grow at a rate of 9.16%, the required rate of return is 12.05%, and the current stock price ($46.65) is fairly priced with my calculation ($46.84). I am recommending Coke’s stock as a buy.

Economic Climate and Industry Performance

According to Value Line Investment Survey the Soft Drink Industry is maturing. Growth over the next year will have to come from other emerging markets. This is a defensive industry, which has little sensitivity to the business cycle. According to our textbook, a defensive industry includes food producers and Coke produces the syrup, which is the main ingredient of Coca-Cola. Despite hypothetical adverse domestic economic conditions in 2006, Coke’s earnings and growth will remain positive.

Standard & Poor’s shows the Soft Drink Industry as being positive. This is due to factors such as the S&P Soft Drinks Index gain of 8.6% in 2006 while the S&P 1500 gained only 4.2%. The earnings and cash flows for this industry are projected to continue to show solid growth. These earnings and growth are projected to increase due to pricing gains, as these companies will increase their prices with little consumer push, along with new product contributions.

Coca-Cola’s Operations and Revenues

As found in Coke’s 2005 annual report, Coke is the largest manufacturer, distributor and marketer of nonalcoholic beverage concentrates and syrups in the world. During the third quarter of 2006, operating income rose 5.5% since the third quarter of 2005. Operating income increased by $24 million during this time from $425 million to $449 million. However, according to Yahoo Finance the most significant component of a recent 2006 third quarter change in operating income was adversely affected by an increase in bottle and can prices attributed to rising costs of raw materials. Standard & Poor’s reports that they expect Coke’s operating profits to increase at a mid-single digit rate as a more favorable product mix is offset by higher commodity costs.

From the third quarter of 2005 to the third quarter of 2006, net operating revenues increased 6.5% as reported in Yahoo Finance. Despite the increase, the 2006 net operating revenues were negatively affected by limited volume and growth. The real driving force of the revenues increase is attributed to product innovation and increased sales in non-calorie beverages such as water, isotonics, and energy drinks. During the third quarter of 2006 90% of total net operating revenues were attributed to bottle and can sales, which were impacted by the price charged per package.

Coke’s Performance over the last five years

2002 (Dec.) 2006 (projected) Growth

Sales (mill) 19564 23500 20.12%

Earnings per share $0.46 $0.53 15.22%

Stock Price $43.82 $46.64 (current) 6.44%

The data above shows an increase in sales, earnings per share, and stock price over the last five years, which is a positive indication of Coke’s 5-year performance record. This increase shows that Coke has been successful with their growth over this time period. Coke’s sales have grown considerably over the five years due to product innovation and growth in emerging markets. Investopedia defines earnings per share as the portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability, and as shown above, EPS has grown considerably. As shown in Coke’s stock price growth over the time period, it has become more valued by investors as its revenues and profits increase.

4. Some assessment (qualitative and quantitative) of the risk associated with the common stock of the company including an estimate of a fair required rate of return for the stock should be included if possible. Risk measures provided by other sources such as Value Line can be used here if you wish.

5. An application of either a dividend valuation model or earnings multiplier model should be included for the stock if possible.

The Use of the Constant Dividend Valuation Model:

The