What Buffett and Trump Have in Common

Coca-Cola (KO) has been around for over 130 years.

Every day, people drink more than 1.9 billion servings of Coke in more than 200 countries worldwide. Some of those servings are from Warren Buffett and Donald Trump, who both love drinking the soda. 

No wonder KO is financial pros’ top beverage stock search month after month, according to our proprietary Trackstar database.

And lately, there’s been a lot of interest in the stock near its all-time highs, while markets struggle to gain a foothold.

The stock isn’t exactly cheap, at 23.1x forward earnings and 22.1x forward cash. But there might be more here than meets the eye.

Coca-Cola’s Business

Coca-Cola is one of the most recognizable brands in the world. It’s so entrenched in our lives, there’s a whole sub-industry of its memorabilia.

And it garners more than 40% of nonalcoholic beverage sales.

Coke’s portfolio includes more than 4,700 beverage products from more than 500 brands, including soda, energy drinks, and non-carbonated beverages.

Coke divides its business by geographic location, which is quite balanced.

Source: Coca-Cola Q4 2022 earnings presentation

Coke has also entered the alcoholic beverage market through key collaborations. 

The company has expanded its digital sales and distribution channels to meet changing customer demands.

Financials

Source: Stock Analysis

After spinning off its bottling operations and once the pandemic passed, Coke sales grew fantastically.

Its latest quarterly earnings showed revenue growth of 11.3% year over year. Price increases helped pad the bottom line and fight inflationary pressures.

Coke generates a ton of cash, helping it sustain a dividend payout ratio of nearly 75% and a yield of just under 3%.

The company also maintains a fairly low debt load of roughly 4x cash.

Valuation

Source: Seeking Alpha

As we mentioned, Coke isn’t cheap. Across most measures, it’s expensive.

For example, although PepsiCo (PEP) trades at a higher forward price-to-earnings ratio, it trades at half Coke’s price-to-sales ratio and a slightly cheaper price-to-cash ratio.

Keurig Dr Pepper (KDP) is cheaper on a forward P/E and price-to-cash-flow basis.

Out of Coke’s closest peers, only Monster Beverage (MNST) and Celsius Holdings (CELH) trade at higher valuations. But as you’ll see in a moment, that’s largely due to their growth.

Growth

Source: Seeking Alpha

Coke’s 11.3% YoY revenue growth is almost on par with Monster’s 13.9%.

Coke’s 6.8% expected growth is pretty impressive, since the company typically grows less than 5%.

The company’s also done great at growing its bottom line, on par with or better than most of its competitors.

Profitability

Source: Seeking Alpha

Interestingly, Coke is the most profitable of its peers in gross, EBIT, and net income margins.

Its return on equity is pretty impressive. Its returns on assets and capital aren’t too shabby either.

Our Opinion 7/10

It’s tough to buy a stock like Coke at its current valuation, especially when you can earn almost 5% on Treasury bonds.

But the company’s margins are impressive. With more volume, they’d produce more cash.

KO currently trades at $61.32 a share. Somewhere around $55 is where we’d get interested.