The Razor’s Edge

2-Year Price History

Ockham’s Rating

KO Stock Evaluation

Looking at KO since last week, there has been little movement in price on a percentage basis. Additionally, there haven’t been significant revisions to earnings estimates for KO. Given this, we are maintaining our Fairly Valued rating. While there may not have been any meaningful changes in either price or earnings outlook, we still want to analyze where KO is in relationship to its historical fundamentals. Looking at the ratios and multiples described below and throughout this report is the best way to evaluate the strength of KO’s current Fairly Valued rating.

KO Revenue

As we have often noted, in our valuation methodology, "Cash is King." Well, it goes without saying that if a company cannot produce sales then there is no ability to generate cash flow. By that logic we look very closely at revenue numbers as our second most important factor in valuing a company’s stock. We have established reasonable Price to Sales per share ranges based on historical data of the last 10 years. For, KO the high and low end of the Price to Sales per share ratios are 3.74x and 2.72x respectively.

Notice that KO’s current Price to Sales per share ratio is 2.94x, which is below its historical average only slightly. So, while not a huge positive for our analysis, we do feel it is worth noting that KO does look a bit undervalued on a Price to Sales basis, all other factors being equal. However, if the Price to Sales ratio drops further, Ockham Research is likely to become more bullish on this stock.

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 below their historical average multiples of Cash Earnings, as calculated by our proprietary analysis. It is incredibly important to understand that for KO, the current level of Cash Earnings compared to its historical levels helps identify where KO is in relation to what the investing community was willing to pay for this level of Cash Earnings in the past. With a historical high Cash Earnings per share ratio of 15.03 and a historical low Cash Earnings per share ratio of 10.89, an investor can relate where value becomes optimal.

With a historical average Cash Earnings ratio of 12.96, the current Cash Earnings ratio of 11.03 is a positive opportunity for value in the Ockham view. Naturally, we would love to see a deeper value opportunity for KO, but to get there one of two things must occur (or both). Either the stock price must decline further to increase the long term buying opportunity, or the management at KO needs to earn more cash. If either, or both, of these occur, then we could see a significant gap emerge between what investors were willing to pay for in the past, and where KO is trading currently (latest close price of $43.55).

KO Dividends

A positive Ockham rating does not require a company to pay out an inviting dividend or a dividend at all. However, we believe dividends provide a useful measure of a company’s inherent expectations.

Comparable to our analysis of Sales and Cash Earnings per share, we examine dividend yields from KO against the historic high and low levels over an available data range. Because KO has an established history of paying a dividend to shareholders, there is value in comparing recent dividends to historical dividends. In KO’s case, the estimated annual dividend is $1.52 producing a current dividend yield of 3.49%. The highest dividend yield from KO in recent history was 3.77% while the lowest dividend yield was 1.02%. KO’s current dividend yield is therefore significantly higher than its median dividend yield historically. In fact, the current yield is 45.72% above the median which weighs very positively on our analysis of KO.