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Coca-cola - a value stock? - investing


There has been much talk lately about Coca-Cola and its ability as a value stock - as it now spots a bonus yield of 2. 6% (which is the maximum payment yield since the late 1980s) and a P/E or less than 21 - right at the bed of its five-year low. Moreover, the flow price of approximately $43 a share is also near the bed of its nine-year range - (nine years ago, the last ex- great CEO of Coke, Roberto Goizueta, was still at the helm of the company). Sure, Coke has had its own set of problems, but it is a great company, they would argue - and heck, Den Buffett is also an owner of Coke shares.

Don't get me wrong. I actually like Coke as a company. Its brand is as American as can be, and yet over 70% of all its sales are derivative from exterior of North America. The kingdom with the chief burning up per capita of Coca-Cola is Mexico. According to Interbrand. com, the brand name of Coca-Cola is worth approximately $67 billion and is the world's come to one brand name. Who could not recall the illustrious declaration of Coke's patriarch, Robert Woodruff? When the United States made the certitude to enter World War II, he positioned his hand on his heart and distinctively acknowledged that he would "see that every man in costume gets a bud vase of Coca-Cola for five cents everywhere he is and anything it costs. " Of course, it didn't hurt that Woodruff's friend, All-purpose Dwight Eisenhower, was a great advertiser of Coke as well. By the time the war ended, hundreds of thousands of fighting men and women became a fan of Coca-Cola for the rest of their lives.

Under the leadership of Goizueta, Don Keough, and Doug Ivester, Coca-Cola emerged as a augmentation and must-own stock for the duration of the late 1980s and up to the mid to late 1990s. Keough was the great motivational speaker, while Goizueta was matchless in his aptitude to "manage" the stock price and the Wall Boulevard analysts who enclosed the non-alcoholic drink business and Coca-Cola. Goizueta had a habit of inspection the stock price of Coca-Cola on an intraday basis on a laptop in Coke's headquarters. When Den Buffett was business shares of Coca-Cola back in 1988, he and Keough figured it out by inspection the battle of the trading and tracing those purchases to a adviser based in Omaha. Ivester, a previous accountant, could have been regarded as a great monetary alchemist. Under the economic leadership of Ivester, Coca-Cola bought out many of its bottlers and named the creature as Coca-Cola Enterprises. The bottler went communal in November 1986.

When Coca-Cola Enterprises (CCE) went public, Coca-Cola (the company) owned 49% of its outstanding shares. Since of this, Coca-Cola had the capability to raise syrup prices at will (the previous accord mandated that Coca-Cola only adjusted its price to match inflation for its syrup in the North American market) - thus squeezing the profit margins of the bottler but ever-increasing its own revenues and profits. The stroke of genius was this: Since of the fact that Coca-Cola only owned 49% of CCE, it did not have to firm up any of its economic statements with CCE. At the time, not one lone analyst fully tacit this relationship. Year-after-year, the ballet company delivered. Goizueta cautiously (personally) managed all the in order that came out of Coca-Cola. He would face-to-face call Wall Avenue analysts. Any analyst that dared to difficulty him openly or be dissimilar with Coca-Cola's balance projections would be rebuffed. One such analyst was Allan Kaplan from Merrill Lynch, who at one point wrote a note to his clients observing that Coca-Cola may be depending on Japan for too much of its profits. When Goizueta found out about the note, he responded heatedly with correspondence to both Kaplan and his bosses at Merrill Lynch. Kaplan was banned from presence analyst meetings at Coca-Cola for more than a year. From that point on, analysts knew not to mess with Goizueta and Coca-Cola.

Keough officially retired in 1993 while Goizueta conceded away in October 1997 - succumbing to lung cancer. Ivester succeeded as CEO but after the scenes, the circle was in disarrays. Citizens loyal to Keough and to Ivester clashed - with the ex- group compass reading the brunt of the hardship. The in progress CEO, Neville Isdell (who was loyal to Keough and the only true competitor for the top job back then) was sent into "exile" to Great Britain to head up a bottler. According to a contemporary Affluence article, "The leading challenge [with Ivester], though, was his tin ear. Ivester was high in IQ but awfully short on EQ. A self-made, stubborn, very shy son of North Georgia millworkers, he had gotten where he was all the way through brains and hard work. He resented Keough's grandstanding, say ancestors who knew him well, and never fully cherished the consequence of Goizueta's approximately daily chats with directors. (Ivester declined to comment. ) Already long, head-down and full tilt in a disordered market, Ivester had divided European regulators, executives at big customers like Wal-Mart and Disney, and some big bottlers, as well as Coca-Cola Enterprises (on whose board sat Burrow Buffett's son Howard). As he raced to put out fires, he became increasingly inaccessible from his own board of directors. One character was charge in touch with them, though, even in his retirement-Don Keough. "

By December 1999, Ivester was out as CEO, after board members Lair Buffett and Herbert Allen told him that they have lost confidence in his leadership. If anything, the next CEO Doug Daft fared even worse than Ivester. Daft, an Australian and who ran Coke's Japanese operations, did not have a clue about the cultivation in Atlanta. In a sort of reprisal for Ivester's managing of Keough's loyalists, he also made many of Ivester's choice executives leave the company. He also looked for quick fixes - for example, by annoying to boost Coca-Cola's profitability by basically plummeting headcount. By May of last year, Daft was out as CEO, and Neville Isdell - a previous dear of Keough - came out of retirement to run Coca-Cola.

Described as "charismatic," Isdell may be the best man for the job, but it is still too early to see what he can do at this stage to regenerate the brand. Under the leadership of the trio of Goizueta, Keough, and Ivester in the 1980s and much of the 1990s, the shares of Coca-Cola were a must-have and Coca-Cola was regarded as a advance stock. Choose also keep in mind, however, that the run of KO at some stage in that time also occurred in the midst of the maximum bull promote in U. S. stock bazaar history.

Again, readers ought to ability to remember that I have constantly contended that we are still in a secular bear advertise - a bear bazaar not unsimilar to the 1966 to 1974 secular bear market. While indices such as the Dow Industrials, Transports, the S&P 400 and S&P 600 have in good health nicely since the cyclic bear bazaar base in October 2002, large caps such as Coca-Cola, Microsoft, or even GE have never exceedingly covered, and it is my belief that large caps will carry on to underperform once the bear reasserts itself a bit this year. The bonus yield of 2. 6% may or may not help, but who would want to hold a "value stock" once the Fed Funds rate is better than its payment yield (as of right now, the Fed Funds rate is 2. 5%)? I especially do not see deep value here. While a P/E of 20 is at the low end of its five-year range, it is appealing to note that Den Buffett ongoing business his shares of Coca-Cola in 1988 when the P/E was only 13 (with a advertise cap of less than $15 billion) - and analysts at the time were proclaiming the stock to be expensive! S&P presently projects a fair value of Coca-Cola at $46, so there is certainly not a great margin of wellbeing here.

While I accept as true Coca-Cola is a very biting brand and must be a part of every investor's long-term core holdings, I do not consider it is a good time to buy at this point. The advance in the stock price of KO was neither due to luck nor coincidence - it was due to Goizueta's clever management of the stock price, Keough's salesmanship of the company, and Ivester's economic genius - along with a busy bull advertise more than everything else. Even though the lack of leadership in Coca-Cola at some point in the last seven years, part of the old dream of KO being a development stock has still hung on - for far too long. For KO to be an beautiful stock once again, this cause will need to see a more compelling valuation, such as a stock price of $25 to $30 a share. At some point, however, I deem KO may be a glamour stock once again (as it still has a lot of capability in China and India where only a total of about 850 million cases of Coke completed food were shipped in 2004, compared to 20 billion cases for the complete world), but not until some of the weak hands have been shaken out from the stock.

Please let us know your opinion and opinions. Is KO a buy, hold or sell?

Henry To, CFA is the organization appendage of Disinterestedness Partners, LP, a SEC registered hedge fund. He is also editor of the investment website, http://www. marketthoughts. com.


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