Coca-Cola co. Coke, 코카콜라 리뷰

Executive summary of the Coca-Cola co.

 

 The intrinsic value of Coca-Cola as of October 2014 supports our recommendation of selling the stock. There are 5 methods to demonstrate the recommendation whether sell or buy the stock.

 

  Through the 2 stage dividend discount model, we got the intrinsic value of 38.86, DDM with earnings multiple terminal value, we got the intrinsic value 33.17. On the Multi-stage dividend discount model, we got 30.72. For the free cash flow to the firm model, we got 38.896 and free cash flow to equity investors, we got 38.807. On the value line table, there is the market value of 43.64.

 

 By using that, we can observe all the intrinsic value that we calculated is less than the current market value, so we concluded them as overvalued stock, and recommended to sell them. Along with the decision making, we had also analyzed the company’s ratios related to earnings and also the company and industry analysis to see if the recommendation will make sense in the long-run.

 

Economic and industry analysis

 

The Coca-Cola co. is included in the consumer products industry and sub-industry as the beverage industry. The beverage industry is changing their targets from the soft drinks which were volume leading categories to the health and wellness oriented categories. The soft drink categories is losing volume and sales comparing to the previous year, while wellness oriented categories is keep increasing their volume growth.  

 

The Coca-Cola Company that leads its Industry keeps trying to absorb the market changes by diversifying their product lines. They acquired Honest Teas which is specialized in organic bottled tea, and invested in Aujan Industries which is a beverage company in the Middle East.  Besides, Coca-Cola acquired the biggest Coke bottlers in North and Latin America, raising its market share throughout the world much further.

 

Fundamental Analysis of the Coca-Cola

 

1)   2 stage method

Given dividend in year 2015 ($1.32) and 2018 ($1.65), dividend in 2016 and 2017 was calculated under assumption that the dividends will grow at a constant rate of 7.72% through the four year. After 2016, we assumed that the dividend will grow at a constant rate of 13.58% (terminal growth rate). With discount rate 16.5% which was calculated above, the PV of all the projected future cash flow (intrinsic value) with growth rate 13.58% and discount rate 16.5% using 2-stage model is $38.86 per share.

 

 2)  EPS growth method

With projected EPS 2014 and P/E ratio 2014, year-end price of the stock in 2018 is $53.65. Using the same discount rate (16.5%) as 2-stage method, the present value of terminal value in 2018 is $29.13 and when by adding the PV of expected dividends from 2015 to 2018, the intrinsic value using price from EPS is $33.17 per share.

 

3)  Multi-stage method

Under assumption that the dividend growth rate will be increasing from 2019 (7.72%) to 2028 (12.99%) and then will keep constant (13.58%) from year 2029, with the discount rate 16.5%, PV of all future cash flow (intrinsic value) is $17.47 per share.

 

4)  Free Cash Method

In calculating intrinsic value with Free Cash Flow method, we assumed that the after tax profit, depreciation, P/E ratio, capital spending per share, long-term debt, shares outstanding, earnings per share and the working capital will grow in same rate from 2015 to 2018. Factors used are all same as we assumed for other valuation methods. With after tax profit, interest (long term debt * (1-tax rate) * cost of debt), change in working capital, depreciation and capital spending (capital spending per share * shares outstanding), we calculated free cash flow to the firm (after tax profit + interest – change in working capital + depreciation – capital spending) and free cash flow to equity ( FCFF – interest + change in long term debt) from 2015 to 2018 and terminal value assuming that the company’s cash flow will grow at same rate from 2019 (2018 FCFF or FCFE * (1+growth rate)/ (WACC – growth rate). We calculated the discount rate, WACC (portion of debt to value * 1-tax rate * cost of debt + portion of equity * cost of equity). Portion of debt was calculated debt/market value equity where market value equity is P/E * after tax profits (portion of equity is then 1- portion of debt). By discounting each cash flow with WACC, we got intrinsic value for FCFF and FCFE. We subtract long term debt 2014 from PV (FCFF) and divide it by shares outstanding and got intrinsic value of $89.415 per share. Consequently, dividing FCFE by shares outstanding the intrinsic value per share is $36.523.