The Razor's Edge

2-Year Price History

Ockham's Rating

KO Stock Evaluation

As noted in the Recommendation Summary, we are content with maintaining our Undervalued rating on KO. Although there has been no additional earnings guidance offered by KO's management in the last week, the stock price has increased by 6.52%, which is a negative from a value perspective. However, while the price increase does make the stock less attractive, it is only marginally less attractive and not enough to warrant a downgrade. Find more on this and other fundamental factors in our analysis in the paragraphs that follow.

KO Revenue

As a value investing shop, we are interested in seeing how KO's revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock's current underlying value. Using this method, we have established a high range for Price to Sales of 5.40x and the low end of the range at 3.92x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for KO of 3.17x is well below its normal historic Price to Sales levels. At a price of $46.87, KO is 33% below where we would expect to see it. Clearly, this stock looks undervalued compared to historical levels, at least on a Price to Sales basis. This will positively affect our analysis because it is rare to find a stock this far below historical norms, and we would expect some price appreciation to bring this metric back towards a more normal range.

KO Cash Earnings

As a value investment framework, Ockham Research is similar to a private equity firm in terms of our valuation methods. We are always on the lookout for value in the form of sales and cash numbers. In the case of KO, Ockham views their current Cash Earnings as significantly below its historical average multiple of Cash Earnings. Looking at the last 10 years we can get a good understanding of what investors have grown to expect from KO. For example, KO's Cash Earnings ratio per share has fluctuated between 15.72 and 21.69 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where KO is with respect to prior business periods.

So with KO's current price (latest close of $46.87) and most recent level of Cash Earnings reported, we see significant opportunity from a value perspective. At its current price level, KO is 37% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn't exist in a vacuum. So if the market doesn't recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings versus their historical norms. So be patient with KO.

KO Dividends

While it is not necessary to pay an attractive dividend or a dividend at all, to receive a positive rating from Ockham, we view dividends as an additionally helpful measure in determining the future potential of any company.

In KO’s case, the estimated annual dividend is $1.52 resulting in a current dividend yield of 3.24%. Similar to our review of Sales and Cash Earnings per share, we evaluate dividend yields from KO against the historic high and low levels over the past 10 years. The highest dividend yield from KO over this period was 3.77% while the lowest dividend yield was 1.02% If you are looking for some “bang for your buck” then a dividend yield of 35.28% above the historically median should be enticing. KO receives a positive boost in our view because as you know, equity at its core is simply a claim on future dividends.