Coca-Cola Co. (NYSE:KO) reports preliminary financial results for the quarter ended 2012-09-30.
Coca-Cola Co.’s analysis versus peers uses the following peer-set: Nestle SA (FRA:NESR) (PINK:NSRGY), PepsiCo, Inc. (NYSE:PEP), Groupe Danone SA (PINK:DANOY), Monster Beverage Corp (NASDAQ:MNST), Dr Pepper Snapple Group Inc. (NYSE:DPS), Cott Corporation (NYSE:COT) and Reed’s, Inc. (NASDAQ:REED). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
| Quarterly (USD million) | 2012-09-30 | 2012-06-30 | 2012-03-31 | 2011-12-31 | 2011-09-30 |
|---|---|---|---|---|---|
| Revenues | 12,340.0 | 13,084.0 | 11,167.0 | 11,067.0 | 12,255.0 |
| Revenue Growth % | (5.7) | 17.2 | 0.9 | (9.7) | (3.8) |
| Net Income | 2,311.0 | 2,788.0 | 2,054.0 | 1,654.0 | 2,221.0 |
| Net Income Growth % | (17.1) | 35.7 | 24.2 | (25.5) | (20.6) |
| Net Margin % | 18.7 | 21.3 | 18.4 | 14.9 | 18.1 |
| ROE % (Annualized) | 28.2 | 34.3 | 25.5 | 20.4 | 26.0 |
| ROA % (Annualized) | 10.8 | 13.2 | 10.0 | 8.2 | 11.0 |
Valuation Drivers
Coca-Cola Co.’s current Price/Book of 2.6 is about median in its peer group. KO-US’s operating performance is higher than the median of its chosen peers (ROE of 26.5% compared to the peer median ROE of 21.5%) but the market does not seem to expect higher growth relative to peers (PE of 19.9 compared to peer median of 19.7) but simply to maintain its relatively high rates of return.
The company’s relatively high profit margins (currently 18.5% vs. peer median of 9.5%) are burdened by asset inefficiency with asset turns of 0.6x compared to the peer median of 0.8x. Overall, this suggests a margin driven operating model relative to its peers. KO-US’s net margin is less than (but within one standard deviation of) its five-year average net margin of 22.6%.
Economic Moat
The company has achieved better revenues growth than its chosen peers (year-on-year change in revenues of 33.1%) but its earnings growth performance has been below the median (change in annual reported earnings of -27.4% compared to the peer median of 8.4%). This suggests that, compared to its peers, the company is focused more on top-line revenues. KO-US is currently converting every 1% of change in revenue into -0.8% change in annual reported earnings.
KO-US’s return on assets is above its peer median both in the current period (10.5% vs. peer median 7.4%) and also over the past five years (15.2% vs. peer median 7.5%). This performance suggests that the company’s relatively high operating returns are sustainable.
The company’s comparatively healthy gross margin of 64.8% versus peer median of 53.6% suggests that it has a differentiated strategy with pricing advantages. Further, KO-US’s bottom-line operating performance is better than peer median (pre-tax margins of 23.8% compared to peer median 13.5%) suggesting relatively tight control on operating costs.
Growth & Investment Strategy
KO-US’s revenues have grown at about the same rate as its peers (13.5% vs. 12.9% respectively for the past three years). Similarly, the stock price implies median long-term growth as its PE ratio is around the peer median of 19.9. The historical performance and long-term growth expectations for the company are largely in sync.
KO-US’s annualized rate of change in capital of 26.4% over the past three years is higher than its peer median of 18.3%. This investment has generated an above peer median return on capital of 20.5% averaged over the same three years. Evidently, the relatively high capital investment was successful given the relatively strong growth in its returns.
Earnings Quality
KO-US has reported relatively strong net income margin for the last twelve months (18.5% vs. peer median of 9.5%). This margin performance combined with relatively high accruals (3.6% vs. peer median of 1.3%) suggests possible conservative accounting and an understatement of its reported net income.
KO-US’s accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median — which suggests a relatively strong buildup in reserves compared to its peers.
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