Recent

% | $
Quotes you view appear here for quick access.

The Coca-Cola Company Message Board

  • Rickson9 Rickson9 May 5, 1998 5:51 PM Flag

    Discussion of the Intrinsic Value Test

    The discussion is located at http://www.ndsn.com/tic
    Please provide feedback.
    Thanks,
    JimC

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • Hey at
      http://www.stockselector.com/research.asp?searchtype=valuations&symbol=ko they have a "StockSelector Value" which they
      claim to be next year's estimated earnings * the
      historic PE ratio. Isn't this the same thing Mary Buffett
      claims Warren does for stocks?

      They also have an
      "Intrinsic Value" but it appears to be blank for every
      stocks.

    • According to the books I've read, a lot of KO
      folks doubt that
      The Boss really approved New Coke,
      especially since there was
      no witness in the room other
      than Goizueta. Other people say
      that Woodruff
      understood all too well, and that it was no
      coincidence
      that he lost his appetite shortly after the
      meeting.
      I guess we'll never know.
      The irony of the New
      Coke "disaster" was that it reinvigorated
      the
      brand. Because everyone hated New Coke, they remembered

      how much they loved Old Coke. The legend and mystique
      of the
      product came back bigger than ever. With
      the sweeter, coca-less
      "New Coke," Goizueta and
      Keough wanted a Coke that would outsell
      Pepsi by a
      wider margin. Even though New Coke bombed, KO
      got
      more than it had ever anticipated.
      By '86,
      Coca-Cola Classic was outselling Pepsi by a margin
      wider
      than anything Old (pre-New) Coca-Cola had managed in
      years.
      I guess New Coke (a.k.a. Coke II) is still sold in
      some areas of
      the country (not mine; I haven't seen
      it in years), but I think
      it's fascinating how
      the company has gradually "forgotten" about
      New
      Coke.
      "Always Coca-Cola" is a great slogan, for
      example, but it's not
      completely accurate when you
      remember three long months in 1985.
      And the word
      "Classic" on the Coca-Cola Classic can seems to
      be
      getting smaller and smaller every year. I'd imagine it'll
      be
      completely gone in a few years.

    • Its nice to find a friendly face in the crowd
      ,holding a can of Coke. I realize that it was Roberto but
      i liked him and i didn't like Austin . It was
      Roberto that convinced Mr. Woodruff to change the Coke
      formula. He went to his house and told the old man they
      were losing ground to pepsi and that the drink should
      be sweeter and old Mr Bob was nearly 97 gave him the
      go ahead.
      I suspect the grey matter had
      deminished somewhat for Mr. Woodruff would never done that
      in his prime.
      He was noted in Atl as a very
      generous man and gave millions to the city He was trustee
      of his mother and fathers estate and gave it to
      Emory U before his own death. Then gave all of his upon
      his own death .
      His next door neighbor was the
      famous golfer Bobby Jones .
      I met him at his home
      shortly before his death. One of the nicest people I ever
      met., He also owned ko and a bottling plant in Mass.
      Lawyer with Hughes and Spalding The ko's
      lawyers.

      notbuffett

    • After finishing F. Allen's "Secret Formula" and
      (most of)
      Pendergrast's "For God, Country and
      Coca-Cola," I tend to
      agree with your assessment of
      "bozo" Paul Austin. KO had no
      business in wine,
      shrimp, water purification, etc.. Austin
      mixed his
      environmentalism with a lot of business school
      diversification
      nonsense.
      On the other hand, Austin wasn't afraid to make some
      needed
      additions the product line (like TaB, larger
      bottles, cans,
      etc.). And I don't think it's fair to
      blame him for the foray
      into the movie business.
      Goizueta bought Columbia Pictures.
      The story of how
      Austin got bounced is kind of funny. Austin's
      wife
      decreed that no KO employee should eat lunch on the
      company
      plaza because it would attract pigeons. A KO secretary
      wrote
      a letter to Woodruff complaining about Austin's
      wife's order.
      Woodruff was already sick of Mr. and
      Mrs. Austin, and the letter
      was the straw that
      broke the camel's back.
      Since everyone on this board
      is always talking about Warren
      Buffett, I might
      as well join in. Buffett has predicted that
      by
      2020, KO will be the most valuable company in the
      U.S.,
      so I guess he figures it will outperform GE, MSFT,
      and most
      everything else.

    • If ko issues more stock than is authorized we
      will have to vote.
      The company is authorized to
      issue another 2 billion shares .however ,hell hath no
      furry like you would see if it was a wanton act .
      As
      I understand it in order to go into business you
      must have capital, if you do not have it yourself you
      must convince others to join in . you must show
      potential to justify that trust. If you give me 50 thousand
      dollars for 50% of the stock in my new business in
      exchange for the proceeds to be divided equally after all
      liabilities have been met. Now if mycroft comes along and i
      sell him 50 thousand worth of my company he would
      expect to reap the same results, However I no longer
      have any equity in the business you and mycroft can
      take over and i will have to get a job .
      Now if i
      can convince you that if we let that boy in on our
      deal the additional capital will cause the business to
      produce 150 thousand more in revenue by utilizing the
      additional capital, then we could be justified in opening up
      a new issue. KO produces $ 1.59 for each dollar
      invested . now if they issue more stock and do not preform
      close to that ,then Doug and Co. will be working
      elsewhere.
      The period of time you speak of at ko was
      after Mr. Woodruff
      had reached old age and for some
      unknown reason a complete bozo got the reins ,an arrogant
      bird who had no respect from the people who really
      make ko great . He went into the shrimp business ,
      Bought land in the rain forrest to grow oranges to feed
      mm , causing a public relations revolt, bought a
      highly speculative movie business, 20th century fox,
      went into the Wine business. where KO had no knowledge
      , MM is still the worst business at ko its lucky he
      wasn't tared and featherd . But he had a mental problem
      altzheimers and died short;ly after Mr. Bob fired him.
      I
      agree if you are buying stock with your lunch money you
      should not pay too much however if you are going to live
      in a captialist country you will benefit much more
      by being a captialist yourself ,and as buffetts dad
      (a broker himself ) told young Warren dont buy
      anything yet, the markets too high .
      That was in the
      late 50's or early 60's and the dow looked like it
      would never break 1000. If you had purchased ko at the
      height of the bubble in 1929,( ko suffered but you would
      have recovered i believe in less than 18 months) and
      the market was full of 10%owners, Ten cents on the
      dollar, a 10% dip and you had the option of jumping or
      gunfire.
      The people who are on a margin should beware . if you
      own your stock you will sleep much better with a
      smaller peice of pie.

      notbuffett.

    • I share your regard for KO and am a long time
      fellow shareholder but am not prepared to invest in
      anything based on a scarcity of shares theory over
      intrinsic value. Mr. Buffett certainly doesn't; the
      valuation methodology I have been discussing with 2 or 3
      others here is entirely consistent with what Mr. Buffett
      practices and is sound financial theory, not a concoction
      of Wall Street.

      Regarding the notion that
      there is a limited # of shares so buy them at any
      price: Companies can always issue new shares as well as
      retire them. When stock prices rise to obscene levels,
      that's what a lot of them do. I'm not willing to pay any
      price for growth, for KO or anything else.

      You
      might recall the "nifty fifty" phenomenon of the early
      1970's; there were 50 or so stocks called "one decision
      stocks". KO was one of them. For the 10 years of 1973-82,
      KO common stock provided an annualized total return
      of 1%. I don't know the percentage decline it
      suffered in the 73-74 bear market off the top of my head,
      but I'm sure it was 40%+. Since then, of course it
      has resumed its historical march toward making all of
      its shareholders rich.

      Of course, KO is a
      better managed company (one of the very best in the
      world without question) than it was in the 1970's when
      it floundered. I don't look for a repeat of the
      1973-82 returns. No question KO still has tremendous
      growth opportunities all over the world and the know how
      to profitably exploit them. My only point is that
      people shouldn't blindly buy anything at any price. To a
      point I think you and I both made earlier, KO will
      probably bail you out over the long haul if you overpay.
      But I question whether a lot of newer investors are
      prepared for a few years of substandard returns, which
      could happen if interest rates rise and/or we get
      general weakness in the stock market. There are a lot of
      people now who think 15% annual returns are lousy; they
      expect to get that in a month. They are in for a rude
      awakening sometime soon.

      I enjoy your posts. Good
      luck to you, doesn't sound like you really need it.

    • the fact that the analyst pour over numbers does
      not affect the reality of anything all theories are
      just that theories . the only numbers that are of any
      relevance are the bottom lines of the company over time,has
      it prospered or floundered .
      Buffett says he has
      not had a good idea from wall street in over 30
      years, that is one reason he likes to reside in
      Omaha.
      you can turn them and crunch them frome now to
      doomsday the fact of the matter is that there are only 8
      (eight) shares of ko pr person in the U.S.A. and Buffett
      has 200 million slices of that pie, the Sun Trust
      Bank has 183 million slices there are only
      2
      billion slices of pie. So that leaves the rest of us
      about 85% of a pie which leaves only 6.8 shares each .
      The social security is going to start allowing
      investments in equities so i fear if you don't have any ko
      you won't be able to buy any at any price very soon .
      do the math 2 billion chinese and indians what if
      they become investors in KO. HURRY HURRY HURRY

      STEP RIGHT UP ITS GOING FAST GET YOU COKE
      COLA
      REMEMBER PIE R NOT SQUARE CORNBREAD ARE SQUARE, PIE ARE
      ROUND .

      notbuffett

    • For purposes of valuing the residual on KO, I
      assume a slower rate of growth (i.e. 8-10%) after year
      10 and a liquidation value of 20-25 times terminal
      cash flow.

      Also, it was discussed previously
      here before, but keep in mind that while Buffett uses
      the long term bond rate as his discount rate, he
      combines that with conservative assumptions on rate of
      growth. If you use a "most likely" rate of growth (mid
      teens) and a T-bond discount rate, you're in effect
      saying that KO earnings & cash flow will be delivered
      with the same certainty as interest on a T-bond. That
      doesn't leave you any margin of safety. You've got to
      either build in your margin of safety with your discount
      rate (i.e. use 9-10% instead of 6%), as most people
      do, or with your growth rate assumption, as Buffett
      does.

      I think I recall that "The Warren Buffett Way" was
      unauthorized. If he advocates valuing the residual using the (k
      - g) formula, I'd recommend taking the whole book
      with a grain of salt.

    • Dear Rickson9,

      I enjoyed the article very
      much but I thought it was weak
      in its decription of
      the importance of owners earnings,
      which according
      to Mr Hagstrom in his book is as follows:
      OWNERS
      EARNINGS= CASH FLOW - CAPITAL EXPENDITURES
      The article
      should have mentioned that there are few
      companies
      that have had consistantcy in owners
      earnings
      because of their Capital Expenditures being
      unpredictable.
      I always choose to use the the 30 Year Treasury
      Bond in my
      analysis for I am not looking to buy a
      compnay cheap but
      am trying to not overpay when it is
      overvalued. If one uses
      the 9% or lets say the Prime Rate,
      one would never be
      able to find anything to buy.
      By using the 30 year one
      can concentrate on not
      overpaying when one invests in
      his KO dividend
      reinvestment plan. As interest rates climb
      the calculations
      show warning signals and just the opposite
      occurs
      as they fall thus showing buying opportunities.
      Investing
      should be done through Dollar Cost Averaging and thus
      Intrinsic
      Value should be used to compliment that.
      I have
      included below the current calculation using
      the
      "Discounted Owners Cash Flow Using a Two Stage
      Dividend
      Discount Model" which is found on page 258 of
      "The
      Warren Buffett Way". Due to the limitations and
      difficulty
      of posting charts and formulas on Yahoo, It probably
      didn't
      post right. But if you take the numbers and
      put them into
      Table A.20 of that page you will see
      that they are
      accurate.

      ___________________________________________________________
      USING THE CURRENT 30 YEAR TREASURY RATE OF 5.95% WE
      SEE
      THAT WE HAVE A 81 % MARGIN OF SAFETY. IF ONE WERE TO
      USE
      THE 9% FIGURE ONE WOULD GET A MARGIN OF SAFETY OF
      34%. YAHOO
      DOES NOT ALLOW ME TO POST THE
      CALCULATIONS FOR THE 9% FOR THE
      MESSAGE BECOMES TO LONG.
      BUT USING EITHER NUMBER, ONE SHOULD
      STILL COME TO
      THE CONCLUSION THAT IT IS STILL SAFE TO
      CONTRIBUTE
      TO ONES "KO DIVIDEND REINVESTMENT PLAN"

      COCA
      COLA 1997 1998 1999 2000 2001 2002 2003 2004
      PRIOR YEAR CASH FLOW $ 3,420 $ 4,101 $ 4,917 $
      5,895 $ 7,068 $ 8,475 $ 10,161 $ 12,183

      GROWTH
      RATE 19.9% 19.9% 19.9% 19.9% 19.9% 19.9% 19.9% 19.9%
      CASH FLOW $ 4,101 $ 4,917 $ 5,895 $ 7,068 $
      8,475 $ 10,161 $ 12,183 $ 14,608
      DISCOUNT
      FACTOR 0.9174 0.8417 0.7722 0.7084 0.6499 0.5963 0.547 0.5019
      DISCOUNTED VALUE PER ANNUM $ 3,762 $ 4,138 $ 4,552 $
      5,007 $ 5,508 $ 6,059 $ 6,664 $ 7,332


      SUM OF PRESENT VALUE OF CASH FLOWS $ 59,956
      RESIDUAL VALUE CASH FLOW IN YEAR 10 $ 21,000
      GROWTH RATE (G) 5% 30 year bond CASH FLOW IN YEAR 11
      $ 22,050 5.95% CAPITALIZATION RATE
      (K-G) 0.95% VALUE AT THE END OF YEAR 10 ######### DISCOUNT FACTOR
      YEAR 10 0.4224 PRESENT VALUE OF RESIDUAL $
      980,410 MARKET VALUE OF COMPANY $ 1,040,365 SHARES
      OUTSTANDING 2515 MARKET VALUE 413.66 MARKET PRICE 76
      MARGIN
      OF
      SAFETY 81% _________________________________________________________________
      THIS IS THE RESULT OF THE 9% RATE USED IN THE ARTICLE.

      I HAVE USED 19.9% AS MY GROWTH RATE FOR THAT WAS
      THE
      GROWTH RATE OFTHE EPS FOR THE LAST 5 YEARS
      USING FIGURES
      FROM KO'S LAST 10-K FILING WITH THE
      SEC.

      MARKET VALUE 116.42 MARKET PRICE 76 MARGIN OF
      SAFETY 34% ___________________________________________________________

      THANK YOU FOR POSTING THE INTERESTING
      ARTICLE

      MYCROFT

      • 1 Reply to mycrof4
      • I went down this road previously with Norvalis
        (hope you're not the same guy; you're using exactly the
        same calculation and making the same error; he never
        responded). Your calculation for the residual value is vastly
        inflated. The k-g formula doesn't apply in this case (I
        cited Brealy Myers Finance text previously but am not
        going to go to the trouble to look it up and explain it
        again). Assume a 7% growth rate instead. What's the
        residual worth when you have a negative denominator (5.95%
        - 7%)?

        Your valuation implies that only
        5.8% of the current "fair" valuation of KO is based on
        its cash flow for the next 10 years and 94.2% of its
        value is based on the residual value. If you think
        about the concept of present value for a minute, that
        can't be right. You also have a residual value of over
        100x cash flow for a company with an assumed 5% growth
        rate; but today KO is growing in the mid teens and
        sells at less than 50x cash flow.

        I have owned
        KO for a long time, but anybody who thinks it is
        worth over 400, or even 116.42, when it is earning less
        than $2.00/share is smoking something.

        The
        only reason I'm posting this is for relative novices
        who think KO is selling at some huge discount to its
        intrinsic value. Using a discounted cash flow analysis with
        15% cash flow growth for 10 years and a residual of
        22 times cash flow, I get a present value for the
        stock in the neighborhood of 80. KO is a great company,
        a great stock, and richly valued. From this point,
        I think looking for more than 12-15% annual return
        from it is unrealistic. But in a 2% inflation
        environment, a 12% annual return is damn good.

 
KO
43.93-1.15(-2.55%)Jun 24 4:03 PMEDT