The Coca-Cola Company (KO): Is This Beverage Stock a Good Buy?

The Coca-Cola Company (NYSE:KO) is hoping to report better results for the second quarter of 2013 after starting the year off poorly during Q1. According to the company’s 10-Q, revenue was down only slightly, but with very little absolute change in costs operating income fell by 4%. That’s hardly a dramatic decline, but with Coca-Cola currently trading at 21 times trailing earnings the valuation is pricing in moderate to high growth in the business. Looking at the company’s geographic segments, there were small declines in sales in North America, the Pacific region, and Europe. Coca-Cola generated about $480 million in cash flow from operations during the quarter, which is roughly the same amount of cash used on capital expenditures; share buybacks were financed with debt issuances. However, CFO was held back by a large increase in working capital.

The Coca-Cola Company (NYSE:KO) is of course a classic defensive stock, with little change in demand for soft drinks through the business cycle. As a result, its beta is 0.3. The dividend yield, at 2.8% at current prices, is likely not high enough for a pure income investor to get involved but certainly serves as a plus for defensive investors. Wall Street analysts project that earnings per share will increase considerably in 2014, but the forward P/E of 17 still looks high to us; so in value terms, particularly with business struggling rather than growing, it doesn’t look like a buy at this time.

We, Insider Monkey, track quarterly 13F filings from hundreds of hedge funds and other notable investors as part of our work researching investment strategies. Warren Buffett is known as a fan of The Coca-Cola Company (NYSE:KO), and his Berkshire Hathaway Inc. (NYSE:BRK.B) reported a position of 400 million shares in its most recent 13F (though we think it’s safe to day the holding company still owns most of those shares). Find Warren Buffett’s favorite stocks. The Bill and Melinda Gates Foundation Trust disclosed ownership of about 34 million shares (see more stocks the trust owns).

Comparing the company to its peers

The closest peers for The Coca-Cola Company (NYSE:KO) are PepsiCo, Inc. (NYSE:PEP) and Dr Pepper Snapple Group Inc. (NYSE:DPS). Pepsi’s trailing and forward earnings multiples are identical to those at Coca-Cola, and interestingly its beta and dividend yield match its rival’s as well. In addition, Pepsi has also been somewhat struggling recently: its last quarterly report recorded a very small rise in revenue compared to the first quarter of 2012, with earnings down slightly; this isn’t much different from what we saw at Coca-Cola either. Dr. Pepper Snapple, while it doesn’t share the brand power of these two companies, carries a significant discount in earnings terms, with a trailing P/E of 16. It has been experiencing growth, albeit only modest growth, so its cheaper valuation is interesting. In addition, Dr. Pepper Snapple boasts a beta of 0 and a slightly higher yield than either Coca-Cola or Pepsico.