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Decision
by WealthEffect Staff

 
 

Coca-Cola's Checklist
 
  Other Considerations  
  Buy the Stock?  
 
1.

Checklist — the Coca-Cola Company
 
 
Company

Yes

No
 
 

Do you really understand the business?


 
  Does the company have a cost advantage?  
  Is the product superior — actual or perceived?  
  Are there barriers to entry in the industry?  
  Is the industry an oligopoly (only a few competitors)?  
  Are the company's advantages sustainable?  
 
Management

Yes

No
 
 

Do the managers own a lot of stock? Are they buying more for themselves? (If they're selling, be wary)


 
  Do they have a vision, and a strategy to realize that vision?  
  Are they paid fairly?  
  Has the stock outperformed its competitors during their tenure?  
  Is the Board of Directors predominantly comprised of independent, highly capable members?  
  Do you trust the management with your money? Are the managers focused on creating shareholder value?  
 
Stock

Yes

No
 
 

Has the earnings per share (eps) growth been stable? (last 10 years vs. last 20)


 
  Are eps estimates rising?  
  Is the free cash flow positive after deducting dividends?  
  Is the company repurchasing shares?  
  Is the stock out of favor on Wall Street?  
  Is the expected ROI attractive to you?  
 
Checklist — Advanced
 
 
Company

Yes

No
 
 

Is the pretax margin higher than its competitors?


 
  Has the pretax margin been rising over time?  
  Has the R&D ratio been rising, as well?  
  Has the SG&A ratio been declining?  
  Is the interest coverage ratio above 3?  
  Have accounts receivable and inventories been rising less than or equal to sales growth?  
  Has sales growth been reasonably close to earnings growth?  
  Have sales and earnings growth come primarily from internal growth (rather than from acquisitions)?  
  Have "non-recurring" charges been few and far between?  
 
Management

Yes

No
 
 

Has the compensation of the top five managers accounted for < 10% of pretax income?


 
  Have company options accounted for less than 10% of pretax income? Has the company avoided the questionable practice of repricing options when the stock price declined?  
  Is the Chairman of the Board an outside board member?  
  Have there been no disagreements with or changes of auditors?  
 
Stock

Yes

No
 
 

Is the 10-year RORE greater than 20%?


 
  Has the RORE been rising (5-yr > 10-yr)?  
  Is the operating free cash flow positive after dividends?  
  Is the operating discretionary cash flow significant?  
  Is the P-E (adjusted for goodwill) attractive to you? Relative to the average P-E of the S&P 500?  
 
2.

Coke's checklist has some problems, particularly for a stock which trades at 33x the eps estimate for next year: RORE has been declining during the last decade and is below 20%, while future estimates have been lowered time and time again. A new CEO was recently announced following Doug Ivester's two-year tenure which presided over the company's worst results in decades. Finally, the 20-year ROI of 13% is attractive, but hardly compelling (the 10-year ROI is 12%).

Operationally, North America continues to be intensely competitive, an intensity likely to only increase given Pepsi's renewed focus. At the same time, international operations which provide ¾ of income are being hit by three factors: weak economies and weak currencies generally and the aftermath of a health scare particular to Coke's products in Europe.

 
 
3.

In the face of all these concerns, is the stock a buy? The short answer is "yes" (the longer answer is "yes, but…"). Coke is facing many uncertainties, but it a company which justifies the benefit of the doubt, both in its operations and in its leadership.

The stock isn't a bargain, but to the extent you are invested in the market, it is in our opinion more attractive than the average, being one of the few investment-grade stocks and offering a higher estimated ROI than the average stock in the S&P 500 Index.

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