Coca Cola (NYSE:KO) is one of the best-known brands in the world. The red-and-white label is iconic and ubiquitous; the fizzy drinks are sold in 200 countries.
For many years, Coca-Cola was seen as a boring stock. Its magic drink formula was virtually unrecognised by the market – until Warren Buffett bought a half-a-billion stake in the beverage company back in 1988.
Suddenly, the world viewed Coca-Cola in a different light. It became a ‘growth stock’. In the last three-and-half decades, Coca-Cola’s share price rose by nearly thirty times. That’s a handsome return.
Over or Undervalued?
At $60 per share, is Coca-Cola still worth buying? Judging from Coca-Cola’s long-term bullish price trend, the answer seems like a foregone conclusion: Yes.
For those doubting the beverage company, then always refer back to Warren’s 400 million shareholding. If the stock is good for him – especially as a ‘forever stock – then it should be good for anyone else.
But remember, Berkshire Hathaway bought the stock way earlier than most investors. He spent $1.3 billion over seven years to buy that stake. The buying stopped in 1994. Now, this position is worth more than $24 billion. Annual dividends alone would have recouped this investment many times over.
Moreover, Berkshire benefitted from four share splits since the eighties, thus compounding the return.
In other words, the position is so profitable Warren can afford to hold.
For those non-shareholders looking to buy, the answer to questions is not so straightforward
In 2022, the drinks company’s revenue totalled $43 billion. This figure is set to have grown for 2023.
Again, net earnings in 2023 are also expected to surpass the 2022’s $9.5 billion. A back-of-the-enveloped calculation (assuming 10 per cent growth) shows that net profit will perhaps reach $10.45 billion. The first nine months already saw net profits accrued to $8.7 billion.
Using the figure of 4.324 billion shares outstanding, Coca-Cola’s earnings per share is (roughly) in the region of $2.40. That’s a PE ratio of around 25x.
12-Month Forecast
Is this expensive? Value investors may think it is. With a PE ratio in the mid-twenties, Coca-Cola is certainly no great bargain. Furthermore, its dividend yield of 3 percent is not much higher than long-term Treasuries. There are many other stocks out there that could be more attractive in terms of valuation.
The thing is, Coca-Cola’s share price seldom fluctuates greatly. Its price volatility, compared to many other investments, is relatively low. This has two repercussions. One, this stock will not rise like a “stonk” (or like another most other big tech stocks). Two, it will not plummet significantly either. Even the global COVID pandemic only set the stock price back by a third. And this correction lasted just a month.
Coca-Cola Fair Value
What will Coca-cola’s share price be in twelve months time? Based on its long-term trend and pattern, it will not be too far off from the current price level of $60. The median estimate from 22 analysts is $65.
Therefore, in view of all these factors, we can say Coca-Cola is certainly not a stock for everyone. For sure, it is a highly profitable company with good margins. This ensures that its profits will not change drastically year to year – a great business. But to buy it at a fair price, you will have to exercise great patience.
Jackson is a core part of the editorial team at GoodMoneyGuide.com.
With over 15 years industry experience as a financial analyst, he brings a wealth of knowledge and expertise to our content and readers.
Previously Jackson was the director of Stockcube Research as Head of Investors Intelligence. This pivotal role involved providing market timing advice and research to some of the world’s largest institutions and hedge funds.
Jackson brings a huge amount of expertise in areas as diverse as global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University and has authored nearly 200 articles for GoodMoneyGuide.com.
