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Coca Cola Introduction:
With a history that dates back to 1886, the Coca Cola Company started with only one product- the Coke, which existed as the Company's only product for almost 70 years. The expansion started in 1955 and then the Company grew on to become one of the greatest Companies in the history that caters to the need of people with various lifestyles, backgrounds, and perceptions. The Company produces and sells over 3500 beverages, incorporated into a wide variety of categories such as low calorie, regular and no-calorie beverages, fruit juices and drinks, bottled water and energy drinks and tea and coffee brands (World of Coca-Cola, 2014).
Rationale for Coke as the choice for investment analysis:
A number of reasons may be assessed as to why Coke may stand as a prospective investment proposal. The primary reasons may be presented as:
The dynamic adjustment in Company portfolio according to the requirements of customers
The Coca Cola Company has a tendency of maintaining the product portfolio as per the shifting preferences of the market. The Company recently decided to decrease the heavy reliance on carbonated drink product segment, given that people were shifting from high drinks to low calorie one. The Company still managed to have a total six percent sales rise in the carbonated drinks segment in the initial quarters of the year 2014. The low calorie and natural beverage preferences of consumers are growing as a threat to the market that Coke has created for itself. However, they are well made aware of this fact in time and are reducing their reliance on sparkling waters along with carbonated soft drinks, the segment that occupies about seventy percent of the Company sales. The comparison of its nearest competitor, PepsiCo says that the Company has only thirty-one percent of its sales reliance on carbonated soft drinks and others on different product lines, including snacks.
The probable favorability of the deal involving Green Coffee Mountain Roasters
A recent deal between Coca Cola and the Green Coffee Mountain Roasters (GCMR) took place in February, with an involved amount of 1.25 billion dollars, wherein ten percent of stake in GCMR was acquired by Coca Cola. The deal was again reestablished at 16 percent stake in the Company. The area of opportunities for Coke in this deal lies in the fact that the Company can now explore new product line of beverages of home-brewed origin. This move can be said to tap the recent need for preservative drinks and flavored free drinks. The prediction of market analysts suggests that the Company is eventually going to purchase the Company in the near future, to strengthen its position in the new product line.
The consistent and mind blowing performance of Coke in emerging markets of the world.
Though the sales of Coke in the domestic market are at a decline, the growth of the Company's sales and popularity in the emerging economies has been exceptional. The revenue from these emerging markets to total revenue is essentially in a growing trend. The growth in the Asia-Pacific region is as high as 8 percent whereas the total sales of the Company in the second quarter of 2014 saw an increase of only three percent. The growth rate in the Chinese economy is as high as nine percent. A whopping sixty-five percent of China's carbonated drink industry is comprised of Coca-Cola, and the share of China's sales of Coke in the total sales of Coke is 5 percent. The exceeding performance of the Company in emerging markets has proven to be a makeup for the Company’s diminishing performance in the developed and saturated markets. . The competitors of Coke such as the Pepsi are also trying their best to make as much impact on the emerging markets as the Company Coke.
The Company’s efforts in marketing have resulted in increased impacts and thus rise in revenues and profits.
The expenditure that Coca Cola has been allocating for its marketing campaigns was as high as $400 million dollars in 2014. The Coke team has conducted a number of successful campaigns in 2014 alone, making it visible that Coke’s marketing strategy has worked wonders in establishing it further into the mindsets of people. One of the most successful campaigns has been the “Share a Coke” campaign, which was able to arouse a lot of excitement and positive feedbacks from people all around the world. Also, as the Company decided to be a sponsor for the global event like FIFA World Cup of the same year, people have been able to connect more clearly and deeply to the image that the brand wants to portray. The end results have been high profits and increased revenues.
Constantly Increasing Valuation:
In the last five years, the rate at which the Coca Cola Company’s revenues are growing standing at an average of 7.96 percent. The major increase in overall revenue was observed in the year 2011, which are particularly because of the Coca Cola Enterprise’s American operations acquisitions. There is a rise in sales, but at a diminishing rate, which is appearing as a considerable problem for the Company, with competitors like PepsiCo and Dr. Pepper Inc. increasing their impacts in the market.
Coca Cola Company has also been able to save on the costs incurred as compared to most of its competitors. The rise in the gross profit margin of the Company to 6.17 percent is a key indicator of this fact. The Company has adopted techniques and technologies that can help it save additional costs. There is consistency in the dividends that the Company provides and this tendency has continued for more than fifty decades of the Company’s life. It has made sure that the payout ratio of the Coke Company is higher than its competitors. The payout ratio has also been consistent, leaving out the decline in 2010. The cash flow position of the Company has considerably increased and improved, as shown by the figures rise from a $6423 million to an amount of $10542 million, giving us a growth rate of 6.4 percent per year. Same was the situation with the amount of free cash flow available to the Company. The rise in the free cash flow was at the rate of 4.73 percent per year, from a $5524 million to an amount of $7992 million (Bidnessetc.com, 2014). This reflects the strong cash stand of the Company and also depicts that the Company has been continually increasing its dividend payouts. The big picture of the Company’s cash position thus can be said to be favorable, as the cash position figure stands at $18.14 billion and the principles of bonds with maturity date in 2015 stands at an amount of $3.5 billion.
The Grand Stock of Dividend that the Coca Cola Company is.
The most stable dividend of all times, Coca Cola is considered a trustworthy brand for major investors. The consistent dividend history of Coca Cola dates back to 1920, and the credibility has been so good that it has secured itself a place in the list of ‘S&P500 Dividend Aristocrats’. The dividends have been on an increasing trend. The payout ratio of the Company constitutes about 52 percent of the free cash flow that the Company holds, giving us a good rate of almost two times for the dividend coverage ratio.
If we compare the performance of the Coke Company considering the competition that the Company has, keeping price as the basis, we could say that the Company has exceeded its top-notch competitor, the PepsiCo Company for a good and long five years. The pace and nature of stock movement is also in line with the competitors, as the movement is simultaneous. This simultaneous movement ensures the steady price of the Coke products, which is parallel to the competitor product prices.
The stock analysis can be correctly assessed by following the trend in which the share process had changed for the Company in comparison to when it first issued its share i.e. the Initial Public Offering (IPO) (Stock Analysis on Net, 2014).
The changes in stock prices have been presented in the following table:
The financial analysis can be obtained by calculating the following five important ratios and analyzing them:
The current ratio is an important metric that gives the mathematical relationship between the business entity’s current assets and current liabilities, to describe a number of key features. The two terms used in this ratio are:
Current Assets: - Current assets are those acquisition or holdings of the Company that can be easily converted into cash in a short time, the time generally being considered a year.
Current Liabilities: - Current liabilities are those obligations of the Company that can be payable in cash in a short time, the time generally being considered a year.
We can observe that the current ratio of Coke has been increasing from 2010 to 2012. This means that the Company has followed the conservative policy of current asset management, where bigger amount of current assets is maintained in comparison to the current liabilities, to maintain liquidity. However, the ratio is far less than the 2:1 ideal current ratio.
Quick ratio is the one that explains the state of the business, whether it is in a situation to pay all its outstanding debts or obligations in a time frame of one month or as early as it may be possible. From this definition of quick ratio, we can deduce that Quick assets are such ratios that have the ability to generate cash with a month or as early as it may be possible. Thus, inventory is not included in quick assets.
The formulae for the calculation of the involved terms are:
Liquid Assets = Current Assets – Stock – Prepaid Expenses
Current Assets= Cash in Hand + Cash at Bank + B/R + Short Term Investment +Debtors (Debtors – Provision) + Stock (Stock of Finished Goods + Stock of Raw Material + Work in Progress) + Prepaid Expense
The quick ratio of the Company shows consistency over the years.
Net Profit ratio:
The relationship between the net profit that a Company earns and the sales of that Company is mathematically given by the Net Profit ratio. The calculation of the term is:
Operating Net Profit = Operating Net Profit / Net Sales *100
The net profit margin of the Company has been in an increasing trend over the years meaning that the net profit has increased in relation to sales.
Return on Assets:
The return on assets figure of the Coke Company has a varied graph. The Company’s ROA is in a decreasing trend, particularly because the Company is moving towards a conservative policy in the maintenance of current assets.
Return on Equity:
The return on equity figure of the Coke Company has a varied graph. The Company’s ROE is in a decreasing trend, but the decrease or increase is quite small so that we could say it is still stable.
Criteria for Investment Decisions:
The financial background of the Company and the brand value and goodwill associated with that background gives a direction as to if the Company is a good investment prospect.
The trend in which the stock prices change could give a clue on the future prediction of the Companies’ stock prices. These future prices can be a basis for investors in analyzing and deciding their investment options.
The financial ratios calculated above are a good measure of how the Company is performing and may perform in the future. The ability to pay off creditors is also given by the financial analysis. This idea is a good basis for investment decisions.
Competitor Analysis: In order to analyze the investment options from all sides, we also need to assess the competitor’s performance along with the Company’s performance. The assessment may also be done by comparing the yields of the Company and its closest competitor (Financial Analysis of PepsiCo and Coca-Cola. 2014). The closest competitor, in this case, would be Pepsi.
The analysis of the given information tells us that the dividend approach followed by Coke is that of a steady and stable one whereas the approach followed by Pepsi is more aggressive one. Pepsi has thus increased the pace of its dividend distribution over a short period of time (Coca Cola & PepsiCo: What is all the fizz about? 2014). Other factors to consider in the investment in Coke may be summarized as:
The intensity of Pepsi dividend goes to the extent that in 2004, when the Coke offering of dividend (quarterly) was around one cent, the same offering of Pepsi stood at 16 cents.
The competition between the competitors also exists in terms of the rates of Company dividend. The proof of this competition is the statement, which reflects the annual increase in the dividend distribution of Coke for a regular period of 49 years and the annual increase in the dividend distribution of Pepsi for a prolonged period of 39 years.
The Company can be recommended in a number of points where the Company may capitalize on its near future opportunities. The summary of the recommendations may be:
Valuation models of different varieties must be performed
Ultimate price to earnings valuation model
HR practices are to be well Implemented
Performance of comparative valuation
Economic Profit analysis shall be carried out effectively
There are a number of areas of opportunities that the Coca Cola Company may capitalize on. The major opportunity exists in the form of expansion in emerging markets of the global platform. The areas of global expansion may be in expanding the product line-up to beverages that are non-carbonated. It may also be in terms of restructuring the Company's model of business and improvising on the consistency of result in earnings (Ukessays.com, 2014).
But in order to utilize these opportunities, there is equal number of challenges that the Company has to face. An effective system of evaluation is a prerequisite. The primary challenge is that of heightened competition not just in regional or domestic level, but at the global level. This competition is not just in terms of products and services but also in terms of processes that the Company follows. An improvised system of HR functions could result in bigger incentives for the Company. Long term growth and efficiency of the Coke Company can be ensured by focusing on a holistic approach, with better campaigns.
ConclusionWe could thus deduce that there are many opportunities revolving the Coca Cola Company’s future in terms of the market share, expansion in geography or expansion in product lines. These opportunities make the Coca Cola Company a prospective good investment. There are certain challenges such as the declining popularity of still beverages, declining sales in developed parts of the world and the uncertainty in the GMCR acquisition. Despite all these challenges, the Coca Cola stock stands as a better purchase option as compared to other competitors in the same industry. The future prospects of the stock are also good as there is enough room for the value of Coke stock to grow. All these plus points and the feather on the hat; the brand name of Coca Cola all combine to make Coke a prospective Company in an investor’s portfolio.
Bidnessetc.com,. (2014). 7 Reasons Coca-Cola Is A Buy. Retrieved 6 December 2014, from http://www.bidnessetc.com/business/7-reasons-cocacola-is-a-buy
Ukessays.com,. (2014). Recommendation of Coca Cola based on performing various valuation models. Retrieved 6 December 2014, from http://www.ukessays.com/essays/business/recommendation-of-coca-cola-based-on-performing-various-valuation-models-business-essay.php
Coca Cola & PepsiCo: What is all the fizz about?. (2014) (1st ed.).
Financial Analysis of PepsiCo and Coca-Cola. (2014) (1st ed.).
World of Coca-Cola,. (2014). Coca-Cola Beverages & Products │ World of Coca-Cola. Retrieved 6 December 2014, from http://www.worldofcoca-cola.com/coca-cola-facts/coca-cola-beverages-and-products
Stock Analysis on Net,. (2014). Coca-Cola Co. (KO) | Profitability. Retrieved 6 December 2014, from http://www.stock-analysis-on.net/NYSE/Company/Coca-Cola-Co/Ratios/Profitability
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