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QuestionsCategory: Valuation QuadrantValuing Coca Cola
Chui Ong asked 5 years ago

Hi, 
I am practicing my valuation on Coca Cola. 

KO
2011
2012
2013
2014
2015
CAGR

 
 
 
 
 
 
 

Revenue
46542
48017
46854
45998
44294
-1.23%

EPS (Diluted)
1.85
1.97
1.9
1.6
1.67
-2.53%

FCF
6554
7865
7992
8209
7975
5.03%

FCF per share
1.35
1.72
1.79
1.85
1.94
9.49%

In this case, the CAGR varies from -2.5 to 9.5. Which CAGR should I be using to calculate PEG and the DCF?
Or should I be using a different valuation ratio for KO? Also what is your advise on investing in mature companies like KO? Good company but seems like there is limited growth prospects. 
 
Thanks!
 

1 Answers
Victor Chng answered 5 years ago

Hi Chui Ong,
 
Coca Cola is a well known company and most investor know about it. Hence, the company have a certain PE range that the investor are willing to tag a price to it. You have to find the average trading PE range of Coca Cola and buy it either at the average trading range which is fair value or below. 

Chui Ong replied 5 years ago

I see. Thank you Victor.

I went back and calculated the PE for the past 5 years. By taking the highest and lowest price of each year and divide it by the EPS of the prior year. Correct hor?

I got a PE range of 18-28. Now the PE is about 25. So that’s considered pretty expensive right?

Also, I went back to calculate the PE of KO during the 08 crisis. At it’s lowest price of $18 in 2009, that was a PE of 7.5! If one had invested in KO during that time at $20/share. After adding in all the dividends and capital gain, it would have been 114% gain over 7 years.

So my next question is, if the next crash comes along, and KO’s PE drop to 7.5 again, would it be a good buy? Or given nowadays that people are cutting down on sugary drinks (possibly why KO has been having decreasing EPS the last 2-3 years), one should pass on KO?

Chui Ong replied 5 years ago

Oops sorry wrong, after adjusting for the share split, the PE during the 08/09 crisis was 15 not 7.5.

So I guess at PE of 15, it’s probably not the most undervalued stock at that time, but it still had decent returns over the years.

Victor Chng replied 5 years ago

I think the company is already at their mature stage when is the reason why sometime they are decreasing in EPS but i believe if they increase their price, they will still increase their revenue and people will still continue to drink coke after all. Great finding on the PE range. Hence, if coke ever hit the lower PE range again, it may be an opportunity for investor.

Chui Ong replied 5 years ago

Oops sorry wrong, after adjusting for the share split, the PE during the 08/09 crisis was 15 not 7.5.

So I guess at PE of 15, it’s probably not the most undervalued stock at that time, but it still had decent returns over the years.

Chui Ong replied 5 years ago

I see. Thank you Victor for sharing your views!