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Coca Cola Stock Price


There has been much talk lately about Coca-Cola and its potential as a value  stock - as it now spots a dividend yield of 2.6% (which is the highest dividend  yield since the late 1980s) and a P/E or less than 21 - right at the bottom of  its five-year low. Moreover, the current price of approximately $43 a share is  also near the bottom of its nine-year range - (nine years ago, the last former  great CEO of Coke, Roberto Goizueta, was still at the helm of the company).  Sure, Coke has had its own set of problems, but it is a great company, they  would argue - and heck, Warren Buffett is also an owner of Coke shares.

Don't get me wrong. I really like Coke as a company. Its brand is as American  as can be, and yet over 70% of all its sales are derived from outside of North  America. The country with the highest consumption per capita of Coca-Cola is  Mexico. According to, the brand name of Coca-Cola is worth  approximately $67 billion and is the world's number one brand name. Who could  forget the famous declaration of Coke's patriarch, Robert Woodruff? When the  United States made the decision to enter World War II, he placed his hand on his  heart and famously declared that he would "see that every man in uniform gets a  bottle of Coca-Cola for five cents wherever he is and whatever it costs." Of  course, it didn't hurt that Woodruff's friend, General Dwight Eisenhower, was a  great promoter of Coke as well. By the time the war ended, hundreds of thousands  of fighting men and women became a fan of Coca-Cola for the rest of their  lives.

Under the leadership of Goizueta, Don Keough, and Doug Ivester, Coca-Cola  emerged as a growth and must-own stock during the late 1980s and up to the mid  to late 1990s.  Keough was the great motivational speaker, while Goizueta was  unmatched in his ability to "manage" the stock price and the Wall Street  analysts who covered the non-alcoholic beverage industry and Coca-Cola. Goizueta  had a habit of watching the stock price of Coca-Cola on an intraday basis on a  computer in Coke's headquarters. When Warren Buffett was buying shares of  Coca-Cola back in 1988, he and Keough figured it out by watching the action of  the trading and tracing those purchases to a broker based in Omaha. Ivester, a  former accountant, could have been regarded as a great financial alchemist.  Under the financial leadership of Ivester, Coca-Cola bought out many of its  bottlers and named the entity as Coca-Cola Enterprises. The bottler went public  in November 1986.

When Coca-Cola Enterprises (CCE) went public, Coca-Cola (the company) owned  49% of its outstanding shares. Because of this, Coca-Cola had the ability to  raise syrup prices at will (the former agreement mandated that Coca-Cola only  adjusted its price to match inflation for its syrup in the North American  market) - thus squeezing the profit margins of the bottler but increasing its  own revenues and profits. The stroke of genius was this: Because of the fact  that Coca-Cola only owned 49% of CCE, it did not have to consolidate any of its  financial statements with CCE. At the time, not one single analyst totally  understood this relationship. Year-after-year, the company delivered. Goizueta  carefully (personally) managed all the information that came out of Coca-Cola.  He would personally call Wall Street analysts. Any analyst that dared to  question him openly or disagree with Coca-Cola's earnings projections would be  rebuffed. One such analyst was Allan Kaplan from Merrill Lynch, who at one point  wrote a note to his clients observing that Coca-Cola may be depending on Japan  for too much of its profits. When Goizueta found out about the note, he  responded angrily with letters to both Kaplan and his bosses at Merrill Lynch.  Kaplan was banned from attending analyst meetings at Coca-Cola for more than a  year. From that point on, analysts knew not to mess with Goizueta and  Coca-Cola.

Keough officially retired in 1993 while Goizueta passed away in October 1997  - succumbing to lung cancer. Ivester succeeded as CEO but behind the scenes, the  company was in disarrays. People loyal to Keough and to Ivester clashed - with  the former group bearing the brunt of the hardship. The current CEO, Neville  Isdell (who was loyal to Keough and the only true competitor for the top job  back then) was sent into "exile" to Great Britain to head up a bottler.  According to a recent Fortune article, "The biggest problem [with Ivester],  though, was his tin ear. Ivester was high in IQ but terribly short on EQ. A  self-made, stubborn, very shy son of North Georgia millworkers, he had gotten  where he was through brains and hard work. He resented Keough's grandstanding,  say people who knew him well, and never fully appreciated the importance of  Goizueta's almost daily chats with directors. (Ivester declined to comment.)  Before long, head-down and full tilt in a turbulent market, Ivester had  alienated European regulators, executives at big customers like Wal-Mart and  Disney, and some big bottlers, including Coca-Cola Enterprises (on whose board  sat Warren Buffett's son Howard). As he raced to put out fires, he became  increasingly isolated from his own board of directors. One person was  keeping in touch with them, though, even in his retirement--Don  Keough."

By December 1999, Ivester was out as CEO, after board members Warren Buffett  and Herbert Allen told him that they have lost confidence in his leadership. If  anything, the next CEO Doug Daft fared even worse than Ivester. Daft, an  Australian and who ran Coke's Japanese operations, did not have a clue about the  culture in Atlanta. In a sort of retaliation for Ivester's handling of Keough's  loyalists, he also made many of Ivester's favorite executives leave the company.  He also looked for quick fixes - for example, by trying to boost Coca-Cola's  profitability by simply reducing headcount. By May of last year, Daft was out as  CEO, and Neville Isdell - a former darling of Keough - came out of retirement to  run Coca-Cola.

Described as "charismatic," Isdell may be the best man for the job, but it is  still too early to see what he can do at this stage to revitalize the brand.  Under the leadership of the trio of Goizueta, Keough, and Ivester in the 1980s  and much of the 1990s, the shares of Coca-Cola were a must-have and Coca-Cola  was regarded as a growth stock. Please also keep in mind, however, that the run  of KO during that time also occurred in the midst of the greatest bull market in  U.S. stock market history.

Again, readers should recall that I have always contended that we are still  in a secular bear market - a bear market not unsimilar to the 1966 to 1974  secular bear market. While indices such as the Dow Industrials, Transports, the  S&P 400 and S&P 600 have recovered nicely since the cyclical bear market  bottom in October 2002, large caps such as Coca-Cola, Microsoft, or even GE have  never really covered, and it is my belief that large caps will continue to  underperform once the bear reasserts itself sometime this year. The dividend  yield of 2.6% may or may not help, but who would want to hold a "value stock"  once the Fed Funds rate is greater than its dividend yield (as of right now, the  Fed Funds rate is 2.5%)? I really do not see deep value here. While a P/E of 20  is at the low end of its five-year range, it is interesting to note that Warren  Buffett started buying his shares of Coca-Cola in 1988 when the P/E was only 13  (with a market cap of less than $15 billion) - and analysts at the time were  proclaiming the stock to be expensive! S&P currently projects a fair value  of Coca-Cola at $46, so there is really not a great margin of safety here.

While I believe Coca-Cola is a very strong brand and should be a part of  every investor's long-term core holdings, I do not believe it is a good time to  buy at this point. The growth in the stock price of KO was neither due to luck  nor coincidence - it was due to Goizueta's shrewd management of the stock price,  Keough's salesmanship of the company, and Ivester's financial genius - along  with a roaring bull market more than anything else. Despite the lack of  leadership in Coca-Cola during the last seven years, part of the old dream of KO  being a growth stock has still hung on - for far too long. For KO to be an  attractive stock once again, this author will need to see a more compelling  valuation, such as a stock price of $25 to $30 a share. At some point, however,  I believe KO may be a glamour stock once again (as it still has a lot of  potential in China and India where only a total of about 850 million cases of  Coke finished products were shipped in 2004, compared to 20 billion cases for  the entire world), but not until some of the weak hands have been shaken out  from the stock.

Please let us know your thoughts and opinions. Is KO a buy, hold or  sell?

Henry To, CFA, is co-founder and partner of the economic advisory  firm, MarketThoughts LLC, an advisor to the hedge fund Independence Partners,  LP.  is a service provided by MarkertThoughts LLC, and provides a twice-a-week  commentary designed to educate subscribers about the stock market and the  economy beyond the headlines. This commentary usually involves focusing on the  fundamentals and technicals of the current stock market, but may also include  individual sector and stock analyses - as well as more general investing topics  such as the Dow Theory, investing psychology, and financial history.

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