coke's story 2012

I have posted about coke before; apart from its enormous brand power, I did not have much to appreciate about. As a continuation of the previous post, the following shows how coke has performed in terms of operations and market value.

The decade

Revenues increased by close to 11% p.a.; Operating profits by 8.25%; However, I have not noticed significant increase in free cash flows to firm. Of course, FCFF depends upon how we calculate it in the first place; I have used after-tax operating profits and past reinvestment in both capex and working capital. Acquisitions also represent reinvestment; in the last decade, coke has reinvested about $19 b in net capex and acquisitions.

Market value of equity is at $173 b now, trading at about 20 times earnings. Coke's high and low PE multiples have reduced over the years perhaps suggesting market's reluctance to accept coke like it did historically. If we compare high-to-high market values over five or ten year periods the return to the shareholders is pathetic. Even if we consider low-to-high market values the annual return over five-year period is about 11.51% and over ten-year period it is about 8%. Not great by any measure.

The most interesting aspect has been coke's deteriorating after-tax return on capital which stands at about 21% for 2012. Again, definition of return on capital is important here. If we consider only tangible operating assets return on capital is stupendous. I have considered both goodwill (about $12 b at 2012) and other intangible assets as part of operating capital. In 2010, coke acquired Coca-Cola Enterprise’s North American business, which resulted in additional goodwill of about $7.7 b. It depends upon how we look at these assets. Where a firm continues to overpay its acquisitions and recognizes large goodwill on a periodic basis, ignoring goodwill would be a mistake. Charging it to equity would increase return ratios; however, the damage would already be done. Coke may not be in that category. 

Over 60% of revenues come from North America, Latin America and Europe. May be there is scope for growth in the emerging markets.

All said, people still do recognize its brand instantaneously; I still wonder why, though.