Rating Update: Stock Rating F-Lowest (3/15/24)-Coca-Cola Co (KO).

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BUSINESS

The Coca-Cola Company, a beverage company, manufactures, markets, and sells various nonalcoholic beverages worldwide. The company provides sparkling soft drinks; flavored and enhanced water, and sports drinks; juice, dairy, and plant-based beverages; tea and coffee; and energy drinks. It also offers beverage concentrates and syrups, as well as fountain syrups to fountain retailers, such as restaurants and convenience stores. The company sells its products under the Coca-Cola, Diet Coke/Coca-Cola Light, Coca-Cola Zero Sugar, Fanta, Fresca, Schweppes, Sprite, Thums Up, Aquarius, Ciel, dogadan, Dasani, glaceau smartwater, glaceau vitaminwater, Ice Dew, I LOHAS, Powerade, Topo Chico, AdeS, Del Valle, fairlife, innocent, Minute Maid, Minute Maid Pulpy, Simply, Ayataka, BODYARMOR, Costa, FUZE TEA, Georgia, and Gold Peak brands.
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INVESTMENT RATING

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KO’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.

Coca-Cola has a current Value Trend Rating of F (Lowest Rating).
This rating combines inconsistent signals from two proprietary PTR measures of a stock’s attractiveness. Coca-Cola has a very low Appreciation Score of 14 but a neutral Power Rating of 52, producing the Lowest Value Trend Rating.

Coca-Cola’s stock is selling well above targeted value. The current stock price of $59.88 compares to targeted value 12 months forward of $44.
Coca-Cola’s very low appreciation potential results in an appreciation score of 14 (86% of the universe has greater appreciation potential.)
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Coca-Cola has a Power Rating of 52. (This neutral Power Rating indicates that KO’s chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: earnings estimate behavior for KO has been slightly favorable recently; and the Bottled & Canned Soft Drinks, Water comparison group is currently in a modestly favorable position. An offsetting factor is recent price action has been neutral.

INVESTMENT PROFILE

Coca-Cola’s financial strength is above average. Financial strength rating is 62.
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Relative to the S&P 500 Composite, Coca-Cola Co has moderate Growth characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that KO is normal risk. Relative weaknesses include: high financial leverage, low expected growth, and high earnings variability. Coca-Cola’s valuation is moderate: high dividend yield, moderate P/E ratio, and high price/book ratio. KO has unusually high market capitalization.

CURRENT SIGNALS

Coca-Cola’s current operations are stable. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.

Coca-Cola’s current technical position is neutral. The stock price is in a 17.3 month down move. The stock has declined 16.3% from its prior high. The 200 day moving average is in an uptrend. The stock price is below its 200 day moving average. The stock has just risen above its 200 day moving average.

ALERTS

Significant negative changes in investment behavior have recently occurred for The Coca-Cola Co (NYSE: KO): the stock fell on very heavy volume.
The Coca-Cola Co (NYSE: KO). Minimal positive changes in fundamentals have recently occurred: significant quarterly earnings acceleration occurred.
The stock is currently rated F.
On 3/15/24, The Coca-Cola Co (NYSE: KO) stock declined modestly by -1.0%, closing at $59.88. Moreover, this decline was accompanied by exceptionally high trading volume at 258% of normal. The stock has performed in line with the market over the last nine months and has risen 0.7% during the last week.

CASH FLOW

In 2023, Coca-Cola generated a significant increase in cash of +$2,032 million (+17%). Sources of cash were larger than uses. Cash generated from 2023 EBITDA totaled +$14,415 million. Non-operating sources contributed +$1,201 million (+8% of EBITDA). Cash taxes consumed -$2,524 million (-18% of EBITDA). Re-investment in the business amounted to -$3,478 million (-24% of EBITDA). On a net basis, debt investors furnished +$1,296 million (+9% of EBITDA) while equity investors received -$8,878 million (-62% of EBITDA).
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Coca-Cola’s Non-operating Income, %EBITDA has enjoyed a strong overall uptrend over the period. This improvement was accompanied by an opposite trend for the Coca-Cola Peer Group. In most years, Coca-Cola was in the top quartile and lower quartile. Currently, Coca-Cola is upper quartile at +8% of EBITDA (+$1,201 million).

Coca-Cola’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Coca-Cola Peer Group. (Since 2021 Cash Taxes, %EBITDA has experienced a sharp decline.) In most years, Coca-Cola was in the lower quartile and third quartile. Currently, Coca-Cola is at the lower quartile at -18% of EBITDA (-$2,524 million).

Coca-Cola’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Coca-Cola Peer Group. In most years, Coca-Cola was in the third quartile and second quartile. Currently, Coca-Cola is slightly above median at -24% of EBITDA (-$3,478 million).

Coca-Cola’s Debt Investors, %EBITDA has experienced a strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Coca-Cola Peer Group. In most years, Coca-Cola was in the second quartile and top quartile. Currently, Coca-Cola is slightly below median at +9% of EBITDA (+$1,296 million).

Coca-Cola’s Equity Investors, %EBITDA has enjoyed a strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Coca-Cola Peer Group. In most years, Coca-Cola was in the third quartile and lower quartile. Currently, Coca-Cola is substantially below median at -62% of EBITDA (-$8,878 million).

Coca-Cola’s Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Coca-Cola Peer Group. In most years, Coca-Cola was in the lower quartile and second quartile. Currently, Coca-Cola is above median at +14% of EBITDA (+$2,032 million).
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Coca-Cola’s Cash, %Revenue has suffered a strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Coca-Cola Peer Group. In most years, Coca-Cola was in the top quartile. Currently, Coca-Cola is at the upper quartile at +30%.

PROFITABILITY

Coca-Cola’s return on equity has improved very significantly since 2014. The current level of 41.3% is 1.76X the low for the period and is -12.1% from the high.
This very significant improvement was due to very strong positive trend in pretax operating return supported by very strong positive trend in non-operating factors.
The productivity of Coca-Cola’s assets declined over the full period 2014-2023: asset turnover has experienced a downtrend although it experienced a very sharp recovery after the 2020 low.
Coca-Cola’s pretax margin enjoyed a very strong overall uptrend over the period 2014-2023.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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Coca-Cola’s return on equity is at the upper quartile (41.3%) for the four quarters ended December, 2023.
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Operating performance (pretax return on assets) is upper quartile (13.3%) reflecting asset turnover that is slightly above median (0.47X) and upper quartile pretax margin (28.3%).
Tax “keep” rate (income tax management) is at median (82.7%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is above median (3.77X).

GROWTH RATES

There are no significant differences between Coca-Cola Co’s longer term growth and growth in recent years.
Coca-Cola Co’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 0.4% per year.

Total asset growth has been 0.9% per year.

Annual E.P.S. growth has been 9.3% per year. (More recently it has been 25.1%.)

Equity growth has been 0.1% per year.

Coca-Cola Co’s consensus growth rate forecast (average of Wall Street analysts) is 5.9% — above the average of the historical growth measures.
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Relative to the Coca-Cola Peer Group, Coca-Cola’s historical growth measures are erratic. E.P.S. growth (9.3%) has been upper quartile. Equity growth (0.1%) has been substantially below median. Revenue growth (0.4%) has been lower quartile. Total asset growth (0.9%) has been lower quartile.

Consensus growth forecast (5.9%) is lower quartile.
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PRICE HISTORY

Over the full time period, Coca-Cola Co’s stock price performance has been highly stable and significantly below market. Between May, 2013 and March, 2024, Coca-Cola Co’s stock price rose +50%; relative to the market, this was a -52% loss.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 4.0% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through February, 2024 of 4.0% is below median relative to Coca-Cola Co (The) Peer Group.

Current 5-year total return performance of 9.1% is slightly below median relative to the S&P 500 Composite.
Through February, 2024, with slightly below median current 5-year total return of 9.1% relative to S&P 500 Composite, Coca-Cola’s total return performance is slightly below median relative to Coca-Cola Co (The) Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, KO’s overall valuation is high. The highest factor, the price/equity ratio, is upper quartile. Ratio of enterprise value/assets is upper quartile. Ratio of enterprise value/revenue is upper quartile. Price/earnings ratio is at median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is below median.

Relative to Coca-Cola Peer Group, KO’s overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Price/equity ratio is at the upper quartile. Ratio of enterprise value/assets is near the upper quartile. Price/earnings ratio is below median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is at the lower quartile.
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Coca-Cola has a very large value gap compared to the median valuation. For KO to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 6.59X to 4.82X. If KO’s ratio of enterprise value/revenue were to fall to 4.82X, its stock price would be lower by $-19 to $41.
For KO to fall to lower quartile valuation relative to the Coca-Cola Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 6.59X to 3.76X. If KO’s ratio of enterprise value/revenue were to fall to 3.76X, its stock price would decline by $-30 from the current level of $60.

VALUE TARGETS

KO’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.
Coca-Cola Co’s current Price Target of $33 represents a -44% change from the current price of $59.88.
Coca-Cola’s very low appreciation potential results in an appreciation score of 14 (86% of the universe has greater appreciation potential.)
With this low Appreciation Score of 14, the neutral Power Rating of 52 results in an Value Trend Rating of F.
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Coca-Cola Co’s current Price Target is $33 (-35% from the 2023 Target of $51 and -44% from the 03/15/24 price of $59.88). This dramatic fall in the Target is the result of a +3% increase in the equity base and a -37% decrease in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted decline in cost of equity has a slight positive impact as well. More than offsetting these Drivers, the forecasted decline in growth has a very large negative impact.
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PTR’s return on equity forecast is 49.9% — above our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2015 and 2023. The current forecast is significantly above the 2015 low of 32%.

PTR’s growth forecast is 0.0% — significantly below our recent forecasts. Forecasted growth enjoyed a dramatic, variable increase between 2021 and 2023. The current forecast is below the 2021 low of 4%.

PTR’s cost of equity forecast is 11.3% — in line with recent levels. Forecasted cost of equity suffered a dramatic, variable increase between 2015 and 2023. The current forecast is steady at the 2015 low of 9.9%.
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At Coca-Cola Co’s current price of $59.88, investors are placing a positive value of $36 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 9.0% per year, and a return on equity of 41.9% versus a cost of equity of 12.1%.
PTR’s 2025 Price Target of $33 is based on these forecasts and reflects an estimated value of existing assets of $48 and a value of future investments of $-14.

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