Why You Still Need To Wait To Buy Coke
Three months ago, I answered the question – Should You Buy Coke? – in one of our investment articles.
Today I tell you Why You Still Need Patience To Buy Coke after it released its latest quarterly earnings. You can read the original article in full at the link above.
But if you don’t want to; here’s a quick recap of why I said you should avoid investing in Coke – for now.
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).
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.
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?
Is Coca Cola Profitable?
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.
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.
It well surpasses what I look for on a minimum profitability basis… But what about its valuation?
Is Coke Undervalued?
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.
This thesis to avoid Coke until it’s cheaper continued playing out after it released its most up to date quarterly earnings on October 22nd, 2020.
- Unit volume fell 4% worldwide in the year to year quarterly period.
- Revenue fell 9% in the year to year quarterly period.
- Operating income fell 8% in the year to year quarterly period.
- And earnings per share fell 33% in the year to year quarterly period to $0.40 per share.
Because its profits fell due to the coronavirus while its share price rose its now even more overvalued than it was back in July when I first showed you Coke.
Its P/E is now 25.8.
Its current P/CF is 24.1.
And its forward P/E is 22.8.
I look to buy companies with valuations below 20 on all these metrics to consider the company undervalued or at worst fairly valued…
Why below 20?
Because that means the company is at worst fairly valued… And if its significantly under 20 that means the company is undervalued.
When a stock is fairly valued or undervalued it gives you more margin of safety in investing terms.
This means you have a better chance of earning higher returns owning its stock over time. And these things combined make it a less risky investment.
With Coke being overvalued it means there’s less margin of safety owning its stock. This means you have a lower chance of earning high investment returns owning it going forward. And these make it a riskier investment.
I’ll keep you updated on Coke in the coming months… But for now, continue being patient and wait to buy its stock until it’s cheaper.
Until then, use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.
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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.