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DETERMINING THE VALUE OF THE COCA COLA
COMPANY – A CASE ANALYSIS
Hailu Regassa, Colorado State University - Pueblo
Laurie Corradino, Colorado State University – Pueblo
CASE DESCRIPTION
The primary subject matter of this case concerns finance related topics and uses actual
financial data to assess the rationale for why and when various models can be used to determine
the stock price performance of the Coca Cola Company. Secondary issues examined include a
determination of the value of the company using the discounted cash flow model. The case
enables students to apply their knowledge of the principles of finance and accounting to a real
world example. It is specifically designed to enhance, among other things, students’
understanding of the selection of appropriate financial techniques and to apply those methods to
a specific company, in this case the Coca Cola Company.
The case has difficulty levels of three, four, and five. The content is appropriate for the
both an undergraduate principles of finance course taken primarily by students at the junior or
senior level (levels three and four) as well as for first-year graduate students (level five). The
case is designed to be completed primarily outside of class as group work with limited discussion
in an in-class setting. Outside preparation time is expected to be three to four hours for students
who have adequate background in the topics included. In-class discussion may range from thirty
minutes to one hour.
CASE SYNOPSIS
Nicki James, a CFO of a wealth fund management advisory group, had been successful in
solving the financial woes of her clients for a number of years. During that time, she had also
dabbled in some investing of her own and was always looking for new opportunities. Therefore it
was no surprise that ideas randomly came to her as one did on that fall day in 2009 as she was
sipping from her can of Classic Coca Cola. Coke, as many referred to the product, had been a
part of her life ever since her early childhood. Thus the well-established nature of the company
along with the new prospects in sight for the organization inspired her to instruct her assistant
and recent MBA graduate, Sarah Mills, to perform some financial analysis on her behalf. Could
Coca Cola stock be the financial goldmine that both Nicki and her clients had always sought?
With a little research and a few calculations, Nicki and Sarah were determined to find out!
BODY OF CASE
On a fall day in 2009, Nicki James, the chief financial officer (CFO) of a wealth fund
management advisory group, was sitting outside enjoying a cool breeze while sipping from her
Journal of the International Academy for Case Studies, Volume 17, Number 7, 2011
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can of classic Coca Cola. As she was sipping, she thought about how Coke, as a beverage, has
evolved over the years. She could remember how, as a young girl, her mother would persuade
her and her siblings to be well behaved and to be kind to each other and would even offer them a
can of Coke as an incentive for their good manners. As she grew older, new versions of the
classic soft drink including Diet Coke, Caffeine Free Coke, Cherry Coke, Coke Zero, and many
others emerged. As incredible as the variations of the coke flavors were, the Coca Cola
Company even began to diversify and began to produce PowerAde, vitamin water, energy
drinks, and juices.
With all of the other newly introduced beverages, the company somehow managed and
even thrived throughout all of the transitions and remained the undisputed leader in the industry
notwithstanding the competitive challenges it faced by the entrance of Pepsi, Dr.
Pepper/Snapple, and others into the market. In fact, being the financial guru Nicki was, she
recalled reading in a business article recently that the company had once again and for the ninth
consecutive year claimed the title of the top world brand outshining a number of equally well-
reputable and successful companies like Toyota, Disney, IBM, Microsoft, Google, and Intel.
The Coca Cola Company, with a listed brand value of $68.7 billion, had gained an amazing three
percent in this measure in less than a year (Trubey, 2009).
Like most financial professionals, Nicki not only utilized her expertise exclusively for her
clients but also delved into investing for her own account in hopes of striking it rich so she could
retire early and lead a comfortable life. Many already knew that the key to her successful career
lied in her ability to select companies with steadily improving and predictable financial
performances. However, she had never investigated Coca Cola as an alternative investment
option in any detail. The memory of what her mother used to say and the encouraging headline
news about Coke’s brand caught her attention by surprise and she decided to explore whether the
stock price performance of the company justified the risk.
One other item that also stuck in her mind, though, was an announcement that had been
released a few months prior regarding a possible national (U.S.) tax on the sugary beverages of
the industry. The tax, if imposed, as she recalled, would be collected as an additional revenue
source for the nation’s healthcare system (Adamy, 2009). The ramifications of such a measure
on the demand for the company’s products could be worth examining as well. With such news
and prospects as her motivators, Nicki began gathering additional information and data needed to
properly analyze The Coca Cola Company and explore whether or not the company’s stock
should possibly be one of the investments included in her portfolio.
Among the latest news that Nicki uncovered, was an announcement by the company of
its plans to double its revenue by 2020. According to company officials, such phenomenal
growth could be achieved, among other ways, through the penetration of new and untapped
markets like China, India, Mexico, and South Africa (Geller, 2009). Nicki was quite intrigued by
these potential market outlets and the company’s growth prospects. On a trip she took a few
years back, she had the privilege of visiting a Coca Cola World museum and had the opportunity
to taste Coke blends that were actually native to many of the countries represented. She had
assumed that the brand that she was familiar with was just as popular in those nations as it was in
the United States but was unaware of the exact expansionary opportunities available.
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Moreover, on the company’s list of modifications, were plans to revise its marketing
approach and to specifically target new segments including multicultural teenagers and women
while also offering new product sizes including a 7.5-fluid ounce mini can boasting a mere 90
calories (“Coca Cola to offer,” 2009). Additional packaging changes proposed included a front-
label energy (or calorie) display to further appeal to health-conscious consumers and juice
packages displaying prominent fruit images emphasizing the healthy contents of the products
(“Coke putting energy,” 2009; Frederix, 2009). Even more awe-inspiring was news of a Coca
Cola vending machine that would allow consumers to quench their thirst by blending flavors to
create their own personalized carbonated beverages (Collier, 2009). Nicki was captivated by all
of these growth prospects and they reinforced her desire to carry out an exploratory
investigation.
While sifting through industry news, Nicki also learned of PepsiCo’s plans to buy some
of its bottlers in an attempt to better control the supply chain and to partner with Anheuser Busch
in an effort to cut costs (Birchall, 2009). Despite such competitive threats, from the preliminary
news Nicki had gathered, she thought that the company’s financial background appeared to be
solid and its prospects bright.
Now, it is time to determine if the number crunching offers a similar positive outlook.
Specifically, Nicki is keenly interested in knowing how much the company is worth and whether
the company’s stock price is under- or overvalued given its current price of $56.54 as of
December 31, 2009.
Nicki has delegated Sarah Mills, her immediate assistant, who after having just graduated
from a reputable business school with an MBA degree joined her wealth fund advisory group, to
sift through and compile the necessary data, and to then make a recommendation. Sarah
immediately got involved and put all of the necessary accounting and financial information
together in order to make a recommendation.
In order to complete her analysis, Sarah made the following assumptions:
* The company carries various outstanding loans with different maturities (Table 5).
These loans are assumed to be rolled over or refinanced at the existing rates upon
maturity.
* Growth estimates (Table 8) in earnings and dividends over the past five years from
various sources range from a low of 7.9 percent to a high of 8.5 percent. Sarah used the
lowest estimate of 7.9 percent to be reasonable and to err on the side of caution.
* Sarah took the overall average of the daily returns of the S&P 500 over a 60-year
period, January 1, 1950 through December 31, 2009, for which data was available on
Yahoo.finance.com, to determine the annualized compound growth rate as a proxy for the
market return.
* She used the 20-year Treasury bond rate (Table 6) as the risk free rate and the current
beta of 0.62 (Table 7) as a measure of the firm’s market risk.
* The company has outstanding short-term loans of $6.32 billion with a weighted average
interest rate of 0.2%. On the grounds that the claim on operating income for such loans
would be immaterial, Sarah decided to exclude them from the determination of the
weighted average cost of long-term debt.
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Additional financial data used include Tables 1 and 2 which provide the income
statement and balance sheet, respectively, for the past five years. Table 3 provides the free cash
flows generated over the past five years while Table 4 outlines the company’s dividend and
earnings history. Table 5 outlines the outstanding bond issues as of December 31, 2009, while
Table 6 provides U.S. Treasury rates for a variety of maturities. Finally, Tables 7 and 8 itemize
various company and industry data.
Table 1: The Coca Cola Company Consolidated Comparative Income Statements
For the Years Ended December 31 (In Millions of Dollars)
2004 2005 2006 2007 2008 2009
Revenue 21,962 23,104 24,088 28,857 31,944 30,990
COGS 7,638 8,195 8,164 10,406 11,374 11,088
Gross Profit 14,324 14,909 15,924 18,451 20,570 19,902
Selling, General, and Administrative 8,626 8,739 9,431 10,945 11,774 11,358
Other 0 85 185 254 350 313
Operating Income (EBIT) $5,698 $6,085 $6,308 $7,252 $8,446 $8,231
Net Interest Income and Other 524 605 270 621 (1,007) 715
Income before Income Taxes 6,222 6,690 6,578 7,873 7,439 8,946
Income Taxes 1,375 1,818 1,498 1,892 1,632 2,040
Minority Interest 82
Net Income $4,847 $4,872 $5,080 $5,981 $5,807 $6,824
Diluted EPS $2.00 $2.04 $2.16 $2.57 $2.49 $2.93
Average Shares Outstanding (diluted) 2,429 2,393 2,350 2,331 2,336 2,329
Source: Morningstar.com
Table 2: The Coca Cola Company Comparative Balance Sheets
As of December 31: (In Millions of Dollars)
2004 2005 2006 2007 2008 2009
Cash and cash equivalents $6,707 $4,701 $2,440 $4,093 $4,701 $7,021
Short-term investments 61 66 150 215 278 2,192
Accounts receivable 2,171 2,281 2,587 3,317 3,090 3,758
Inventory 1,420 1,424 1,641 2,220 2,187 2,354
Other current assets 1,735 1,778 1,623 2,260 1,920 2,226
Total current assets 12,094 10,250 8,441 12,105 12,176 17,551
Property, plant, and equipment (net) 6,091 5,786 6,903 8,493 8,326 9,561
Intangibles 3,836 3,821 5,135 12,219 12,505 12,828
Other long-term assets 9,306 9,570 9,484 10,452 7,512 8,731
Total long-term assets 19,233 19,177 21,522 31,164 28,343 31,120
Total Assets $31,327 $29,427 $29,963 $43,269 $40,519 $48,671
Accounts payable $4,283 $4,493 $929 $1,380 $1,370 $0
Short-term debt 6,021 4,546 3,268 6,052 6,531 6,800
Taxes payable 0 0 0 0 252 264
Accrued liabilities 667 797 4,693 5,793 4,835 0
Other short-term liabilities 0 0 0 0 0 6,657
Total current liabilities 10,971 9,836 8,890 13,225 12,988 13,721
Long-Term Liabilities
Long-term debt 1,157 1,154 1,314 3,277 2,781 5,059
Other long-term liabilities 3,264 2,082 2,839 5,023 4,278 5,092
Total long-term liabilities 4,421 3,236 4,153 8,300 7,059 10,151
Total Liabilities $15,392 $13,072 $13,043 $21,525 $20,047 $23,872
Total Equity $15,935 $16,355 $16,920 $21,744 $20,472 $24,799
Total Liabilities and Equity $31,327 $29,427 $29,963 $43,269 $40,519 $48,671
Source: Morningstar.com
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Table 3: Historic and Current Free Cash Flows
2005 2006 2007 2008 2009
Free Cash Flow (FCF) $5,524 $4,550 $5,502 $5,603 $6,193
(In millions of dollars) Source: Morningstar.com
Table 4: Historic Annual Dividends and Diluted Earnings per Share
Annual Dividend Diluted EPS
2004 $1.00 $2.00
2005 $1.12 $2.04
2006 $1.24 $2.16
2007 $1.36 $2.57
2008 $1.52 $2.49
2009 $1.64 $2.93
Source: Yahoo Finance and Morningstar.com
Table 5: Bonds Outstanding (Late 2009 / Early 2010 – Prices and BV roughly as shown below)
Maturity Date Book Value Price Coupon
Coca Cola, 5.35% 11/15/2017 $1,748,000,000 109.8 5.35%
Coca Cola, 4.875% 3/15/2019 1,339,000,000 103.8 4.88%
Coca Cola, 3.625% 3/15/2014 897,000,000 104 3.63%
Coca Cola, 5.75% 3/15/2011 500,000,000 104.5 5.75%
Coca Cola, 7.375% 7/29/2093 116,000,000 116.9 7.38%
Coca Cola, 5.30% 2018 510,000,000 92.32 (Inferred from financials) 5.30%
Source: Morningstar.com & Coca Cola Company Financials
Table 6: YTM on U.S. Treasuries (12/31/09)
1-month 0.04%
3-month 0.06%
6-month 0.20%
1-year 0.47%
2-year 1.14%
3-year 1.70%
5-year 2.69%
7-year 3.39%
10-year 3.85%
20-year 4.58%
30-year 4.63%
Source: U.S. Treasury.gov
Table 7: Various Other Financial Data
Shares outstanding (non-diluted) (12/31/09) 2,310,000,000
Beta (12/31/09) 0.62
P/E – Beverage Industry $17.23
S&P 500 overall average daily return (1950 - 2009) 0.03%
Source: Yahoo.finance.com
Industry Growth Rate 5.07%
Source (Cooper, 2009)
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Table 8: Company Growth Rates
5-Year Estimated Growth – Morningstar 7.90%
5-Year Long-Term Growth Rate of Earnings - Reuters 8.50%
Historical Compound Growth Rate (based on 5 years of EPS) 7.94%
Historical Average Growth Rate (based on 5 years of EPS) 8.28%
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