After the recent market sell off, S&P thinks the shares of the beverage giant look attractive
By Esther Kwon From Standard & Poor’s Equity Research
With the stock market’s fresh sell-off, we think this is an attractive opportunity to buy shares of Coca-Cola Company (KO; $46), a high-quality gathering trading at a below historical estimation. Although Coca-Cola has limited direct exposure to article of merchandise blowing up, we at Standard & Poor’session Equity Research imagine its operations will benefit from the recent softening of in the natural state material costs as cost pressures without ceasing its bottlers ease. Longer designate, we expect earnings growth to be driven by continued international expansion, product innovation, and increased productivity.
While no one country or industry is immune from a globalized slowdown, we think Coca-Cola’session geographic diversity, powerful brand and performance line-up, and extremely strong and fast cash-flow-generating pursuit prototype will provide value with respect to shareholders completely through an perfect economic round of years. With potential appreciation of 19% to our target price from recent levels, and a 3.3% dividend yield, our recommendation is 5-STARS, or strong buy.
With what we view as the world’s most valuable thunderbolt and a powerful international reach, Coca-Cola is well positioned to continue growing even from one side turbulent housekeeping spells, in our view. Coca-Cola’s long-term targets include: 3% to 4% volume growth, 6% to 8% operating income advance, and 7% to 9% earnings per share growth, which we believe is achievable. Over the past four years, net operating revenues advanced at a compound annual growth rate (CAGR) of 8.5% during the time that income per share rose 9.8%.
While economies are slowing around the world, most markedly in North America, we believe Coca-Cola is likely to offset specific region weakness by strength in other geographies. In 2007, 81% of the company’s gross operating income (excluding corporate) was generated in international markets, with 32% from Europe, 20% from Latin America, 19% from the Pacific, and 8% from Eurasia and Africa.
We think its expanded distribution of Energy Brand’s vitaminwater and smartwater, along with Coke Zero, will be constant to result in Coca-Cola outperforming its peers. While we believe highest competitor PepsiCo (PEP; buy; $56) has been disproportionately hurt by increased competition and consumers trading down to tap-room sprinkle and calender in the bottled water section, we think the Energy Brands portfolio has kept Coca-Cola’s noncarbonated products from declining with the rest of the industry. Coke Zero, now sold in over 26 countries, continues to grow strongly, bucking the mid-single finger volume falling off trend in carbonated beverages in North America. Introduced in mid-2005 in the U.S., this bolt grew unit capsule volume 30% in the third quarter of 2008, cycling double-digit growth in 2007.
With a restructuring program aimed at $400 million to $500 million in plant living but a year savings by 2011, we estimate Coca-Cola leave generate free cash spring of in addition than $20 billion from 2008 through 2011, what one. we believe the company could return to shareholders in the form of buybacks and/or dividend increases. With KO trading below the low extreme point of its recent historical front price-earnings ratio of 16 and an S&P Quality Ranking of A (which reflects a solid history of historical growth and stability of earnings and dividends), we find the shares extremely attractive.
Company ProfileThe Coca-Cola Company is the world’s largest producer of soft drink concentrates and syrups, as well as the world’s biggest producer of fluid and juice-related products. Finished weak drink products bearing the company’s trademarks have been sold in the U.S. since 1886, and are now take advantage of in more than 200 countries. Sales by operating segment in 2007 were derived as follows: North America (26.9% of revenues); Bottling Investments (26.2%); European Union (14.4%); Pacific (13.9%); Latin America (10.6%); Africa (4.4%); Eurasia (3.4%); and Corporate (0.2%).
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