Warren Buffett really likes The Coca-Cola Company (NYSE:KO). Berkshire Hathaway has had a large position in the stock for decades, as Buffett identified it as his classic case of a value stock with a “moat” in the form of its strong brand name and trade-secret formula. Berkshire’s position of 200 million shares, which it has not changed in some time, was worth almost $16 billion at the end of June. It was the largest position in the holding company’s 13F portfolio at the end of June (see more of Warren Buffett’s favorite stocks).
Other investors didn’t have positions quite this large- few even reported $16 billion in total in their 13F portfolios. Boykin Curry IV’s Eagle Capital Management, which was one such fund, owned 7.8 million shares; this made it one of Eagle’s top five holdings research more stocks that Eagle owns). Fisher Asset Management, managed by billionaire and Forbes columnist Ken Fisher, had only a small position in The Coca-Cola Company at the beginning of April but had scaled it up to 4.6 million shares at the end of June (find more stock picks from Fisher Asset Management).
The Coca-Cola Company is a stable, consumer staples company (its beta is only 0.4), so it’s not particularly disappointing that it only managed 3% revenue growth with flat earnings in the second quarter of 2012 compared to the same period last year. The numbers are a bit better looking at the first half of the year, with earnings per share rising 4% over the first half of 2011, but still nobody would mistake Coca-Cola for a high growth company. Considering its business performance, it’s a bit surprising to see Coca-Cola trading at 20 times trailing earnings. It does have a strong brand and makes for a good defensive stock (we’ve mentioned the low beta, and Coca-Cola also pays a 2.6% dividend yield) but that multiple seems high.
PepsiCo, Inc. (NYSE:PEP), the most obvious peer for Coca-Cola, has a trailing P/E of 19. Given that PepsiCo’s revenues actually declined last quarter compared to the same quarter last year, sending earnings down 21%, it’s clear that Coca-Cola is priced well and possibly even undervalued compared to its closest peer. PepsiCo, which also has a considerable snack foods division, pays a slightly higher dividend yield (3.0%) but that is not nearly as large an advantage as Coca-Cola’s brand. PepsiCo, at that multiple, seems quite likely to be overvalued relative to the market as well.
We can also compare Coca-Cola to Dr Pepper Snapple Group Inc. (NYSE:DPS) and Monster Beverage Corp (NASDAQ:MNST). Dr. Pepper Snapple trades at 16 times trailing earnings, while Monster’s P/E is twice that figure at 32. However, Monster is generally considered to have better growth opportunities going forward, with analyst expectations implying a forward earnings multiple of 23. This is still higher than the other companies we’ve discussed, but the fact that the company’s revenues and earnings were about 30% higher in the second quarter than in Q2 2011 would certainly keep us from shorting the energy drink company. Dr. Pepper Snapple is experiencing low growth, and without a strong brand we’d consider it fairly priced relative to its peers.
Even cheaper than Dr. Pepper Snapple is Coca-Cola Enterprises Inc (NYSE:CCE). The European-oriented bottler and distributor of Coca-Cola products certainly faces concerns about macro on the continent, and its revenue and earnings have been down, but it trades at 14 times trailing earnings and 13 times forward earnings estimates. These figures are considerably lower than Coca-Cola’s own multiples, and while we are certainly worried about Europe the company may prove to be a better value.
In general, we think that many of these soft drink companies are overpriced. We’d generally expect a company with a trailing P/E of 20 to be growing considerably faster than Coca-Cola is, and so we would stay out of that stock at this time unless we decided that it made for a good pair trade with, for example, PepsiCo.
