Can someone who likes this stock explain to me why people are paying 40x earnings for it. Anticipated earnings growth this year is like 4%. Coke is noncyclicial, but is susceptible to worldwide depression. Longterm growth from here on won't be fantastic. Why on earth would anyone pay $60+ for a stock that earns $1.60 and a dividend ratio of less than 1.
For what its worth, I think that this stock is an excellent example of why this market is overvalued. There seem to be certain stocks that people get irrational about and just buy. So does anyone have any ideas? Some kind of explanation from a KO enthusiast would be appreciated.
See if I can offer a short answer to this one.
KO's five year average return on equity (ROE) is roughly 50%, (now it's 60%). Cash dividend payout is 32%. That means 68% of the net earnings are retained by the company to add on to the equity base. Theoretically, equity should grow about 34% annually (50% * 0.68 = 34%). In reality, it may grow a little bit less than that, depending on how efficient managers allocate those retained earnings. Coke's people have a good reputation on this one.
Five years from now, equity base should grow to between 3 to 4 times its current size. We know KO's historical P/E ratio is
between 25-40. Now it's close to the high end. Let's assume KO trades at the recent historical average P/E of 30 in five years, its
market cap certainly cannot triple because of P/E retraction. But it should be able to double its current size. That's about 15%
capital appreciation annually. Not spectacular, but acceptable under the current market conditions. Of course, one improves the
return if the purchase is made at a lower P/E ratio. I personally prefer to purchase KO at a P/E of 25 and ride it all the way up
to 40. But it's not realistic at this moment.
Motley Fool's argument for PEP over KO is not convincing, at least to me. PEP's ROE is only half of KO and its dividend payout is almost the same as KO. The P/E ratio is not exactly low, either. It's probably not as reliable as KO, as history shows.
<<Can someone who likes this stock explain to me why people are
paying 40x earnings for it. Anticipated earnings growth this year
is like 4%. Coke is noncyclicial, but is susceptible to worldwide
depression. Longterm growth from here on won't be fantastic. Why
on earth would anyone pay $60+ for a stock that earns $1.60 and a
dividend ratio of less than 1. For what its worth, I think that
this stock is an excellent example of why this market is
overvalued. There seem to be certain stocks that people get
irrational about and just buy. So does anyone have any ideas?
Some kind of explanation from a KO enthusiast would be
I'm not going to attempt to defend KO's stock price -- it's
occurred to me as well that it's a bit rich. However, I am a KO
shareholder and I am sold on the overall excellence of KO as a
company. Briefly, here's why:
1) Excellent management. Since the mid-1980s, KO's management has
been able to achieve spectacular returns on equity and earnings
growth rates by shedding stupid diversification moves made in the
70s and becoming the dominant force in international soft drink
sales. Douglas Ivester may be a new CEO, but he is a long-time
member of KO's management team; therefore, I expect this
excellent management to continue.
2) Most recognized brand in the world. Even an idiot could make
tons of money with the Coca-Cola brand name, and KO is not run
3) Outstanding prospects for overseas growth. International sales
account for 80% of KO's profits, and the internaitonal market is
not even close to saturation. The average person from India or
China consumes between 2 and 3 KO beverages per year, less than
one percent of the 360 or so the average person from the United
States consumes. Coca-Cola has demonstrated an ability to achieve
dominant market share in foreign markets, and I believe that they
can do it in India, China, and other markets where they do not
now have a huge presence. KO could realistically see 20% growth
in some huge foreign markets like India and China for more than
a decade, and these markets are home to more than 2 billion
people. Maybe KO will only see earnings growth of 4% next year
(although I really question the ability of analysts to forcast
earnings with any acceptable degree of accuracy), but its
prospects for long-term double digit earnings growth are still
You say that KO is susceptible to a worldwide depression. This is
true, but just about every company would see hard times in the
event of a worldwide depression -- if you believe that we are
entering a worldwide depression, then I question whether you
should be putting your money in any equities at all.
I didn't mean to imply we were heading towards a worldwide depression. A lot of people (including Soros) seem to think that
disaster is down the road. I personally believe that this is all a big overreaction. But a lot of companies who depend on overseas
sales have been taking a hit while Coke is slowly climbing back up towards its high of 70. I understand that they have excellent
brand name and good management, but why don't people sell KO and buy into a company where the price is a little cheaper. I say
this advice only to people who want to make money. I'm not saying Coke will go down a lot, I just can't see it getting any higher
until earnings catch up. And if the market were to ever really fall.... KO would be one of the ones dragging it down. But thanks
for your response.
If you can give me a good reason why someone would spend $0.60 for a can of sweetened water, and do this every day, year-in and year-out (U.S. consumption, 8 ounce servings), than that is the reason to buy Coke. Water is much cheaper than Coke, perhaps one should buy American Water Works (AWK).
I believe you have a point and that explains some of it. But the more fundamental point is why are people paying so much for
Coke's future earnings. Coke has a quasi-monopoly on a very stable market, BUT why pay 40x earnings for a company who expects 4%
EPS growth this next year and into the future? Coke definately makes easy money turning water into gold (Coke) but that still
doens't justify current levels. The way I figure it Coke should be between a P/E of 20 and 30, probably closer to 20 unless earnings
growth picks up. Well, this is of course just a personal opinion, I'm just curious why people pay so much for it. Thanks.
You are correct that water is cheaper than a can of Coke in the US, but it is a different story overseas. If you have ever been to Europe, for example, water is actually more expensive than Coke and believe it or not, beer. Since a large percentage of revenues come from overseas (roughly 50%) I do not see this being an issue. Also, have you ever requested a water with your McDonald's Big Mac value meal?
KO, for me, has been a fantastic investment. I've enjoyed two
stock splits in a relatively short period of time. My only regret
is not purchasing COCA-COLA much earlier in my life as I'm
now a senior. Yes; Coke is the most recognized symbol on
the planet earth. Yes; I drink at least two cans of coke a
day as well as other coca-cola products. Yes; I promote
my company every chance I get. AND Yes; Buy now and
in the mid term, three to five years, the rewards will be
substantial. P.S.---I'm personally not concerned with the
higher P/E ratio.
I realize Coke has been an excellent investment over the last couple years. But that in no way means that it will continue to be a good investment. It is known for a fact that on average, stocks w/ a higher P/E have lower returns and the reasons why are obvious. You are paying a higher price when stocks have higher P/E's.
Now obviously you are paying for brand name/recognition worldwide, but does it justify the current price? I don't think so. Coke has been a great bet over the last 10 years but my point is that it doesn't look so good now until earnings catch up.