From the FT's Lex blog
People are willing to pay more for Coca-Cola - the drink and the stock. It is pointless to argue that it makes no sense to pay up for brand-name soda. People do, and that’s what matters. But share prices are something else. Coke shares trade at 17 times forward earnings, a hefty premium to the market.
The demanding valuation may be why shares only ticked 1 per cent or so higher when Coke reported solid fourth-quarter earnings on Tuesday.
Coke’s valuation cannot be justified by looking at its growth profile in isolation. It targets a low to mid single-digit expansion. But the company has characteristics that make the share price look reasonable. While growth is not rapid, it is impressively consistent and the company’s profits are spread evenly around the world. In 2011, Europe, Latin America and North America each contributed about a quarter of profits, with developing markets in Asia and Africa making up the rest. Volumes and profits grew in every region - even Europe - and the company raised prices in most regions. Combine this with a universal brand and you have a company that looks more enduring than most nations.
Is there another consumer staples company with a comparable profile? PepsiCo’s profits are much more concentrated in the Americas. The biggest of the global beer companies, AB InBev and SABMiller, do a bit better at emulating Coke’s global reach but they lack single global brands and their European and North American operations are struggling mightily to grow. The closest comparison is probably McDonald’s, but even that company has more of its profits concentrated in Europe and North America than Coke does.
Coke shares may be unlikely to make anyone rich from here but they are even more unlikely to make anyone poor. Shell out and drink up.
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