hey YouTube I'm Jimmy in this video I'm gonna walk through my analysis of
coca-cola ticker symbol KO this continues our series where we're
analyzing all 30 stocks in the Dow Jones Industrial Average with the ultimate
goal of taking those companies and trying to build a great portfolio this
is the eighth video in that series and you can see a link to the playlist in
the description below so for Coke we're going look quickly at the operations and then
we're going to dive into some recent developments so coke owns and licenses
more than 500 non-alcoholic beverage brands worldwide now they break up their
financials in a few different ways first they break out operations by geography
they have North America, Latin America, then they have Europe, Middle East and Africa,
together and then they have Asia Pacific the European geography well that
accounts for the largest volume as far as unit cases with 30% then Latin
America with 27% asia-pacific or 23% and 20% in North America
in cokes last annual report they segmented their beverages into different
categories they have sparkling soft drinks water enhanced water and sports
drinks juice dairy and plant-based beverages and tea and coffee and then
they have energy drinks then finally coke also breaks out their bottling
investments okay so coke sells beverages we know
what they do so interestingly here's cokes revenue since 2008 and as you
could see since 2012 it hasn't been very good revenue has declined for six
consecutive years and as expected free cash flow has fallen right along but
here's something interesting that black bar that's the past 12 months that's the
last two quarters of 2017 in the first two quarters of 2018 and we could see
that its still declining but for some reason these two green bars these are analyst
expectations for 2018 and 2019 now it's important to remember that the Left bar
is 2018 and two of those quarters have are already in the books they're already
done so once I saw that I was surprised and I wanted to see what analysts
expected to happen to revenue so I went back here's the new revenue chart and as
you could see analysts think that revenue is also going to turn higher
just not nearly as much of a jump as they see for free cash flow now I get
this data from Bloomberg and I can see that free cash flow projections are an
average of six analyst recommendations over the past few months revenue on the
other hand is the average of 23 analyst recommendations so I'm gonna bet on the
turn higher being broad consensus although I'm not 100% sure that the
extent of the jump in free cash flow is really the way it's going to play out so
we'll get back to our expectations in a minute but for now let's look at what
happened and then we can try to see what we think will happen so back in 2010
Coke bought the North American bottling business that business traded under the
ticker symbol CCE now CCE is called coca-cola European partners and they're
basically the bottling company over in Europe so since they acquired that
company management has been working on what they're calling re-franchising and
at the start of 2018 it seems that they were mostly completed with that re-franchising
well this re-franchising was a real time drag for management and it forced
them to move around the business and try to reshape the future of coke now in the
recent investor presentation here's how management mapped out their operational
priorities first they're gonna push their leading brands
for example coke has recently introduced Coke Zero sugar
globally and they've launched more than 500 new products and I know that sounds
like a lot but this is in line with the new strategy that they're calling the
test and learn approach and to me this actually makes a lot of sense
this strategy seems to be in line with the way business is done these days a
company puts together what they deemed to be the basics of a product or service
and then they push it out to the public and see if the public likes it if they
like it great they tweak it and make it better and if
the public hates it great you can scrap the project and it doesn't really hurt
you that much okay I like that that seems to make sense to me there are
second focus is on margins for example they're hedging away from water which is
a low margin business and they're trying to focus on higher margin businesses
that makes sense third and that is to improve what they
call their core strengths things like their massive distribution network
that's where the re-franchising plays in they completed their U.S. re-franchising
the one we mentioned before but they also do the same thing with with their
China re-franchising okay then their fourth point is to digitize their whole
system and yes that makes sense digitize that sounds like a better plan like ten
years ago but sure let's do it now better late than never I say and I also
get that coke is huge and that they've been operating the way that they've been
operating for a long time so I understand that perhaps it took them a
little bit longer to jump on the digital bandwagon plus they operate all over the
world so I assume technology is less accessible in some areas I'm I'm not
really I don't know why they haven't done it up to this point but great
digitize the system that's a good plan I like it that's number four on to their
fifth point and that point is what they call unlock the power of the people
and at first I rolled my eyes when I saw this one because to me it sounds like
the same business Lingo you hear from every major company
revenue starts to struggle but then Coke has done some interesting things see a
lot of these points came out a lot of these transition points said how they're
going to shift the business came out in 2015 and at that time they replaced the
CEO and they also created a job called the chief growth officer okay if nothing
else that's a unique name and seems obvious what their role will be but
they've made some dramatic shifts to personnel in general but we'll get more
to that in a second so Coke is also saying that they're trying to become a
more capital light business well if they do a better job of controlling their
distribution and in theory improving their capital expenditures well then I
suppose it's possible that the shifts in the business of let's say trimming down
operations if you really can become a more capital light business where you
have a less capital intensive less capital costly business in theory you'd
have lower capital expenditures which could cause free cash flow to move
significantly higher perhaps that explains the dramatic jump that we saw
in free cash flow versus a dramatic jump in revenue if you cut expenses revenue
wouldn't really change that much but it's very possible free cash flow does
along those same lines management has done what they can to control costs and
improve efficiency throughout the whole organization in addition to shifting
around management this chart this is the point I was making a second ago is the
number of employees over the past few years and as you can see they appear to
have gone a bit nuts when it comes to cutting employee costs now this could be
a good thing from an expense standpoint but it could also be a bad thing if they
go too far and end up hurting operations and this brings us to a different piece
of news so just recently Coke announced the acquisition of Costa Coffee from a
company in Britain for about 4 billion pounds which is about five billion
dollars Costa generated about 1.7 billion dollars in revenue over the past
12 months and they have over 3,200 locations
plus a whole bunch of self-serve locations now think back to the points
that they made before they're trying to push away low margin business pursue
higher margin business pursue business that have greater growth now Coke has
made it clear that this is a strategic decision this helps boost their presence
in the hot beverage segment which is one of the fastest growing beverage segments
in the world and there are only a few large coffee players
Coke believes that if you pair their enormous distribution capabilities with
a solid coffee brand that they can that they believe that they can get Costa to
add significantly to their business and I personally think that this is a good
move given what they spent and given the upside risk seems to be limited while
the upside seems significantly higher okay so now the question is what is coke
worth and should it make our ideal portfolio well when I first started
researching coke I really want to use discounted cash
flow for two reasons first it's my favorite and second I figured that coke
would be the ideal candidate since I assumed that free cash flow would be
somewhat predictable for such a long established company well at this point I
can safely say that it appears that they're on a transition period right now
and free cash flow may not be quite as predictable over the next couple of
years that being said I think it makes sense to try to value coke using a
comparables method like price to earnings multiple or EV to EBITDA now
personally I like to start with consensus estimates so if we're looking
at the p/e multiples consensus has 2018 earnings per share as two dollars and
eight cents per share in 2019 they have EPS as two dollars and twenty three
cents currently Coke is turning at a forward
p/e multiple of about 21 times while the market is trading at 17 times and if you
look at a competitor like Pepsi well Pepsi is trading at a forward p/e
about 18 times so it looks like Coke may be a bit high relative to the market and
relative to Pepsi when I look at cokes three-year average for their forward p/e
well it's about 22 times their five-year five-year average is 21 times so it
looks like Coke has been trading right around where they have been historically
and with Coke trading at about $45 a share it looks like they are right near
their fair value based on p/e well I also want to have
checked their EV to EBITDA multiples which is enterprise value to EBITDA and
that also looks the same as PE does like Coke is trading right where it should be
right now so the real question for us is should it make our ideal portfolio and
what I've realized is that we're probably going to end up with multiple
ideal portfolios to me it makes sense to have a value portfolio a
growth portfolio a dividend portfolio by the way Coke's Dividend is almost three and
a half percent which relative to the S&P which is less than two percent makes their
dividend quite good so at the end of the day I think that from a dividend
perspective I think that Coke is probably a great addition to a dividend
portfolio especially if free cash flow and revenues start to turn higher from a
value perspective probably not so much it at this point if they ever had a dip
down or of something ever happened with the market or revenue significantly
started growing then perhaps we could say that they'd be a good value
opportunity as far as them making our growth portfolio I'd say the same
questions remains does the turn around really happen does free cash flow really jump
if that's true then perhaps if they really started picking up the you know
if this Costa Coffee really added to growth it's possible either way I think
coke is an interesting company and it's something we're gonna have to watch
closely to me I think that they're an ideal fit in a dividend portfolio
because they have such an enormous business they do have an opportunity to
grow as we saw with some of their things specifically free cash flow and I'd love
that in a dividend portfolio but I'm not sure about the value of the growth
portfolio is just yet my question to you is what do you think did we miss
anything huge with coke that you think that will make it better or worse and if
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