Sunday, July 10, 2011

Always Coca-Cola (KO)

The world's biggest seller of sugar water, and a cashcow. Their competitive advantage is their distribution network. This is a short post - nothing to say that hasn't been said elsewhere - the only question is what price I would buy it.

The company estimates they account for 1.7bn out of 55bn (about 3%) drinks drunk daily (this must also include water). They now sell a large number of drinks, not just Coke. In Singapore, for example, we see Minute Maid Pulpy, Heaven & Earth Tea, Vitamin Water.

Quick summary of business
Coca Cola is actually 2 businesses: concentrate production, and bottling. (From Morningstar): The pressure on bottlers' margins and the demands by the syrup makers for distribution and production flexibility have been sources of conflict between the parent companies and their bottlers for many years. (In 2010) Coke has followed the lead of its great rival PepsiCo PEP by acquiring the North American operations of Coca-Cola Enterprises CCE, in a strategy intended to eliminate these conflicts and make the firm more responsive to changing consumer tastes.

Geographical breakdown
Looking at profit, note that:
  • Only the North American sales include bottling.
  • Any bottling done in other regions is in the 'bottling investment' category.

I'd estimate that half their profit comes from emerging markets (Pacific, Latin America, Africa & Eurasia, and perhaps a bit of Europe).

Cyclical and Growth
Trying to get some idea of their growth rate. Looking at growth over the 2008/09 recession. "Unit case volume" growth measures the amount of liquid sold:

They seem to be getting:
  • zero growth in developed countries (~45% of their 2010 profits).
  • high-single or low-double digit growth in developing countries (~55% of their 2010 profits).
Looking at these: 4-5% long term annual growth seems realistic (all driven by emerging markets).

Discounting the 5bn extraordinary profit from buying over CCE's operations, their 2010 EPS is $2.87.

Morningstar (seems to) estimate their earnings at $4.20 per share (?), up significantly from 2010. They project lower growth of 4% in emerging markets, with growth following inflation rate in developed markets. They recommend buying at 13 PE (~ U$ 55)

1 comment:


Coca cola is an excellent company.