Should You Buy Coca Cola?
There may not have been a worst time in the entire history of our country for DraftKings (DKNG) to IPO.
If you could go back in time and invest in one stock it’d be hard to find a better stock to invest in than Coca Cola (KO).
The drink was invested in 1886 by Dr. John Pemberton as a remedy to drinking alcohol during the period’s temperance movement.
In 1888 Dr. Pemberton died and sold his remaining share of Coca-Cola to Asa G. Candler of Atlanta.
Soon after Mr. Candler bought back the remaining interests Dr. Pemberton sold off to various others to gain complete control of the company.
Six years after the first drink was created, the Coca Cola company was officially formed in 1892.
And then on September 5th, 1919 the company IPO’d on the stock market at $40 per share.
Since then its produced enormous returns for shareholders.
If you would have bought just one share for $40 when it IPO’d in 1919 and held until today that one share would have turned into 9,216 shares after the companies 11 stock splits.
And those shares would now be worth more than $400,000.
If you would have reinvested the dividends this entire time your original $40 purchase of one share would now be worth more than $10,000,000.
This is a 249,999X return on your initial $40 investment 101 years ago.
Or an increase of 24,999,900% in that time.
In other words, you spent $1 to make $249,999 back.
This kind of return – even over a long period of time like the 101 years since its IPO – its absurdly high.
To put this into context, if you’re able to invest your capital at a 10% rate of return every year, you’re doing great.
If you’d invested in Coke for the last 101 years, you’d have earned average annual returns of 2,475X per year. Or that your average yearly annual return would have been 247,500% per year…
Every year for the last 101 years if you reinvested the dividends.
This all originally started with selling one carbonated drink that was “excellent and refreshing” according to the first shop owner who tried it.
Coca Cola now offers various kinds of drinks like water, tea, and other carbonated drinks via 500 brands and 3,900 beverage choices.
And its products are now in almost every single country on Earth.
From its humble beginnings in 1886 its grown to the largest drink company in the world.
One of the 50 largest companies in the world.
And one of the best performing stocks in the history of the world.
But it’s done even more than that.
Coca Cola has become a force that helped shape our entire culture.
One example of this is with our modern interpretation of Santa Claus.
Back in 1931 Coca Cola commissioned artist Haddon Sundblom to paint a picture of Coca Cola with Santa Claus for an advertisement.
And because of this one picture – and later Santa related Coke advertisements over the years since then – this is now how the entire world views Santa Claus.
But this is all in the past and doesn’t help you answer the question you’re wondering now…
Should you buy Coca Cola stock today and hope to earn enormous profits with its stock in the future?
We’ll begin figuring this out by looking at its profitability and cash flow.
Is Coca Cola Profitable?
Let’s do a quick rundown of Coke’s profitability and cash flow. Because profits and cash flow drive the long-term value and pricing and value of a stock over time.
I measure this in part by looking at two important metrics.
Operating profits and free cash flow/sales (FCF/Sales).
On an operating profit basis Coke’s produced an average operating profit margin of 23.7% per year every year over the last 10 years.
I look for any company to produce above 10% margins on a consistent basis to consider as an investment.
Its margin is 2.37X this minimum threshold.
What about its FCF/Sales?
Over the last 10 years Coca Cola’s FCF/Sales is 17.8% on average every year.
This is fantastic.
I look for companies to produce FCF/Sales at higher than 5% on a consistent basis. Coke also crushes this number too.
Both operating profit and free cash flow are important because they help show you the true profitability of the company.
The more profitable a company is, the higher its value goes over time. And the more money it can spend on innovations and serving customers.
I estimate that far fewer than 5% of all public companies on Earth surpass my minimum thresholds for the 2 metrics above on a consistent basis… And Coke crushes them.
That puts it in the great operating company arena.
And it’s done this for decades which explains the enormous returns its shareholders got over the last 101 years since its IPO.
It well surpasses what I look for on a minimum profitability basis… But what about its valuation?
Is Coke Undervalued?
As a conservative investor I want to recommend solid, safe, and relatively low risk investments to you.
Often those are achieved by high profit margins and low debt. But it’s also necessary to look at valuation too.
Because if you buy overvalued assets there is a lower margin of safety. And doing this makes the investment riskier.
I want to buy assets that are undervalued in a best-case scenario. And at worst fairly valued.
Right now, Coke is right on the edge of undervalued and fairly valued.
- Its current P/E is 19.9.
- Its current P/CF is 19.5.
- And its forward P/E is 24.3.
I look for companies to sell at ratios below 20 on these metrics to consider the investment undervalued.
These metrics show that Coke is right on the edge of undervalued and fairly valued.
Even though I expect Coke to continue producing great shareholder returns, profits, and cash flow going forward you should hold off on buying its stock today until you can get it at a cheaper price.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.