JannHuizenga/iStock Unreleased via Getty Images
JannHuizenga/iStock Unreleased via Getty Images
In this article, we'll take a look at Coca-Cola Consolidated (NASDAQ:COKE ). This is an American, independent bottling operation that happens to be the largest bottler of Coca-Cola (KO) in the United States.
We'll look at fundamentals, operational characteristics, upside, and challenges for the company, to reach a target and a thesis for this business.
Coca-Cola Consolidated distributes non-alcoholic beverages/soft drinks in 14 states across the USA. The company and its predecessors have been in the industry for over 100 years and is the largest bottler of Coca-Cola beverages in all of the United States.
A common misconception is that the company only bottles and distributes Coca-Cola and company products. This is not the case. 83% of the company's sales are to KO, yes, but they also distribute products for competitors, such as Dr Pepper (KDP) and the Monster Energy Company (MNST).
KO does not have a majority stake in the company. It owns around 5% of the voting power. Through various trusts and legal structures, the company's voting power is controlled by 86% by the Harrison family. This shareholder structure may prove the company to be an unattractive investment to most investors, given that this structure means that the company's yield is likely to remain relatively low. There is little motivation for the business to become a high DGR stock.
Capital appreciation and fundamentals are the battle cry of this business - and for the most part, it will have to be enough. COKE is investment-grade rated and has a debt/cap of below 45%, which is the level I usually look for.
These products are the totality of the company's available products as of FY21. As you can see, it involves both sparkling and still products from several brands, including but not limited to waters, sodas, juices, teas, and sports drinks.
The company does cans, plastic bottles, as well as post-mix products for retailers such as food chains, that allows for the fountain mixing of sodas by the addition of carbonated water with syrup. The company has the allowance of KO to distribute, promote, market, and sell KO products according to specific agreements. The company makes quarterly sub-bottling payments to Coca-Cola for this set of rights. The company has similar agreements with all of the companies for which the company bottles and distributes beverages, including KDP and MSNT.
The company distributes in five main markets which hold around 60 million customers. These markets include 10 plants with 60 distribution centers.
The company owns plenty of PP&E and is a heavily raw material-focused business. Its main input materials are plastic bottles, aluminum cans, sweeteners, carbon dioxide, and packaging materials. Plastic bottles come from cooperatives co-owned with other Coca-Cola Bottlers. Aluminum cans are sourced domestically from two main suppliers, though the company has recently started to include international sourcing to the company's operations.
What this means is that the company has a correlation or risk to input costs from plastics, alumina, corn, sweetener, and other products.
The company's products are sold through various distribution channels such as retail stores, supermarkets, DTC channels, club stores, convenience stores, drug stores, and direct on-location sales (such as restaurants, schools, amusement parks, etc.) as well as vending machines.
Easy - Walmart (WMT). The hypermarket buys a fifth of the company's annual sales volume, with Kroger (KR) at another 13% for the full year of 2021. These two customers together are close to 25% of total net sales for COKE.
Obviously, two such major customers mean that the loss of these customers would have a material impact on the company's operations and profits. Thankfully, there are no signs of this being the case.
The company also has a degree of seasonality to its operations, with 2Qxx and 4Qxx being major sales quarters for the company due to holidays and events. Competition does also exist, even if it's other bottlers and soda companies that sell similar products. The obvious advantage here is scale, allowing companies to efficiently operate marketing/advertising, staff, and the purchase of raw materials. At currently produced volumes, the company still has utilization capacity left across most of its plants based on 2021 production volumes. Around half of the company's real estate is owned, and the rest is leased with very long leases going up until 2040 and beyond.
So, COKE is essentially a play on sodas and soft drinks. They're a Coke-focused distribution and bottling business, with the added edge of being open to, and being able to add additional distribution and manufacturing to its roster.
You may ask - Who picks this instead of buying KO?
Well, there are a few reasons. First of all, COKE has delivered substantially better returns than KO has on a 20-year basis. KO has given investors a 20-year RoR of just south of 200% - which is of course very nice, even if it's slightly below market.
COKE has yielded returns of close to 1,400%, turning an initial investment of $10,000 into almost $140,000. So over the past 20 years, COKE has been the better investment - by quite a margin.
So despite KO being the product company, COKE has actually done better.
In short, COKE is the producer and distributor of KO products, as well as a number of other beverages and drinks, across 5 specific regions in the US. It's a more boots-on-the-grounds investment than is KO given its exposure to raw material inflation, equipment, and distribution as well as some counterparty/customer risk.
The best way to invest in COKE is trying to do so at an appealing, cheap valuation. We had one back when the earnings came in at a disappointment. Since that time, the company has returned almost 25% in a market where the market has dropped 5.6%. COKE has almost done as well as my overall portfolio during the same timeframe, which is quite impressive, given the market environment and macro.
Let's look at COKE's valuation and see at what price I consider this company to be a "BUY" here.
COKE is a play on earnings growth, which the company does in spades. Over the past few years, the company has increased earnings by an average of 26% annualized, which begs the question if such a performance is in any way repeatable.
Analysts say "Yes. The forecast by FactSet is a 14% 2022E EPS growth, and S&P Global is at around 10-20% for 2022 and 2023E. The rapid pace of EPS growth here means that the company has been trading, at times, above a 15X P/E, and rightly so in my view given exactly that growth.
As I said - a dividend isn't something you should be caring about here. The company has one - it's a buck per share a year - but this dividend hasn't been touched in over 20 years, and it's unlikely to be bumped or shifted in the future. No one expects it - not other analysts, or myself.
The current dividend yield comes to a total of 0.17% - that's it.
While I would prefer to invest in COKE at around 15X P/E, which isn't at all impossible looking at company valuation history, the current P/E is close to 17-18X, depending on what earnings normalization you consider to be accurate here.
But investing at a multiple of 17.5X, even if it's more trailing than NTM (closer to 16X NTM, comes with its own risks. Especially if the company trades at close to 1X sales, which as you can see, is somewhat unusual for this business.
COKE P/S (TIKR.com)
COKE P/S (TIKR.com)
Similar highs can also be seen in terms of revenue multiples and book value multiples. The company is currently richly valued, and the question becomes if COKE can offer a repeat performance of the last 10 years or so. Because if it can, then the company is most certainly buyable here.
I am unwilling to assign COKE a higher premium than a 20X P/E, even though the 20-year average comes to 24X. I believe there's a bit too much of that growth exuberance baked into assumptions there, and past performance is sometimes not as indicative of future performance as we might like for it to be.
Still, on a 20X P/E, there are plenty of upsides to be had for COKE.
COKE Upside (F.A.S.T Graphs)
COKE Upside (F.A.S.T Graphs)
So this, of course, isn't bad at all. Is it great? Well, I have several businesses on my list that have better upsides than 14.5% annually, and that also have superior credit ratings and I would argue, safeties.
However, this company is distributing/bottling beloved soft drinks, teas, sodas, water, and energy drinks.
There's something to be said for taking shelter from the storm in a safety enhanced by Maslow's Hierarchy of Needs. Certainly, drinks are at a very foundational level of that pyramid. Even if you can't argue that people "need" coke to survive, I will argue freely with you that these products are much more foundational than say investing in an e-automotive company, or something similar. On that basis, there is an argument to be made for investing in the company.
If we see average valuations of 24X, that upside expands to 20% per year, but I wouldn't personally go that far.
Rather, I'd prefer to buy the company closer to 15X P/e than 20X, which is why even though I give my PT at 20X average, I remain at no position in COKE, and only "may" buy a small starter position here.
Also note that the company hasn't often diluted its equity, meaning a single share of COKE actually costs almost $600/share, which may be prohibitive to some.
However, if you ask me to give you a PT for COKE, then my answer will be $650/share, a conservative 20X P/E for 2022.
That makes this company a "BUY", and that's where I start out at.
My thesis for COKE is relatively simple:
1. Buying undervalued - even if that undervaluation is slight and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation but hovers within a fair value or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
COKE is currently a "BUY", in accordance with this approach.
The company also fulfills several of my investment criteria.
The company discussed in this article is only one potential investment in the sector. Members of iREIT on Alpha get access to investment ideas with upsides that I view as significantly higher/better than this one. Consider subscribing and learning more here.
This article was written by
36 year old DGI investor/senior analyst in private portfolio management for a select number of clients in Sweden. Invests in USA, Canada, Germany, Scandinavia, France, UK, BeNeLux. My aim is to only buy undervalued/fairly valued stocks and to be an authority on value investments as well as related topics.
I am a contributor for iREIT on Alpha as well as Dividend Kings here on Seeking Alpha and work as a Senior Research Analyst for Wide Moat Research LLC.
Disclosure: I/we have a beneficial long position in the shares of KO, KDP either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to do their own due diligence and research prior to any investment. Short-term trading, options trading/investment and futures trading are potentially extremely risky investment styles. They generally are not appropriate for someone with limited capital, limited investment experience, or a lack of understanding for the necessary risk tolerance involved. I own the European/Scandinavian tickers (not the ADRs) of all European/Scandinavian companies listed in my articles. I own the Canadian tickers of all Canadian stocks i write about. Please note that investing in European/Non-US stocks comes with withholding tax risks specific to the company's domicile as well as your personal situation. Investors should always consult a tax professional as to the overall impact of dividend withholding taxes and ways to mitigate these.