The Razor's Edge

2-Year Price History

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 5.76x and the low end of the range at 4.28x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for KO of 3.87x is well below its normal historic Price to Sales levels. At a price of $54.37, KO is 23% 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 the old saying goes, "Cash is King!" However, we prefer to capture a few other items within our analysis to identify "cash earnings". Nevertheless, an analysis of Cash Earnings is absolutely pivotal to assessing a company's value, and currently KO is significantly below its historical average multiple of cash earnings as calculated by Ockham. Similar to our analysis of sales per share, Ockham looks at the last 10 years of cash earnings levels for KO to identify where the current high and low price levels have been historically in relation to profit per share. Again, we utilize a weighted average methodology which relies more heavily on recent years of data. This weighted average framework provides us with an average high Price to Cash Earnings ratio per share of 24.17 and a 17.80 low over the same period.

Now that KO’s current price is $54.37 and its Price to Cash Earnings ratio is 14.90, we are very positive on its outlook from the cash earnings perspective. In fact, KO is now trading a full 30% below its average historical Price to Cash Earnings ratio at these profit per share levels. When our clients ask us why KO has great long term potential, the Cash Earnings levels to current stock is one of our primary reasons. But naturally, now we need for the overall market to recognize this disparity.

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 2.80%. 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 3.15% while the lowest dividend yield was 0.90% KO’s current dividend yield is therefore significantly higher than its median dividend yield historically. In fact, the current yield is 38.27% above the median which weighs very positively on our analysis of KO.