With institutions, we are optimistic about The Coca-Cola Company (NYSE: KO)

This article first appeared on Simply Wall St News.

After a short-term correction, The Coca-Cola Company (NYSE: KO) rebounds with the broader market. Still, the stock remains essentially stable for the year.

With a solid dividend yield and promising third quarter estimates, the company is now on the radar of several institutions. In this article, we’ll take a look at the latest efforts of masters of brand management and estimate the intrinsic value of the action.

See our latest analysis for Coca-Cola

New marketing campaign and institutional optimism

Coca-Cola has just announced the new global platform, Real Magic. This is the first platform since 2016, with a new slogan, ” A Coke away from each other . “

Over the decades, Coca-Cola has used marketing campaigns to become one of the biggest brands in the world. The company collaborated with an advertising agency BETC London and director Daniel Wolfe on this project.

Meanwhile, institutions turn bullish on the stock. UBS places it at the top of its list of high conviction ideas, while Morgan Stanley maintains an overweight rating with a target of $ 65 – citing the return of sales growth and higher margins.

In addition, Evercore ISI has a positive outlook on the European market, despite soaring raw material costs, maintaining an outperformance rating.

Finally, the latest figures from Nielsen show a positive performance for the soft drink category in September, up 9.5%.

Calculation of intrinsic value

We’ll go over one way to estimate the intrinsic value of a stock by taking expected future cash flows and discounting them to their present value. We will use the discounted cash flow (DCF) model for this.

Remember, however, that there are many ways to estimate the value of a business, and a DCF is just one method. If you would like to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St.

Numbers

We use the two-stage growth model, which means we take two stages of growing the business. During the initial period, the business can have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first step, we need to estimate the cash flow of the business over the next ten years.

Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value.

We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we discount the value of those future cash flows to their estimated value in today’s dollars. hui:

10-year Free Cash Flow (FCF) estimate

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

Leverage FCF ($, Millions)

US $ 9.84 billion

US $ 10.6 billion

US $ 11.7 billion

US $ 12.5 billion

US $ 13.2 billion

US $ 13.7 billion

US $ 14.2 billion

US $ 14.6 billion

US $ 15.0 billion

US $ 15.4 billion

Source of growth rate estimate

Analyst x8

Analyst x6

Analyst x1

Analyst x1

Is 5.03%

Est @ 4.11%

East @ 3.47%

East @ 3.01%

Is 2.7%

East @ 2.48%

Present value (in millions of dollars) discounted at 5.6%

US $ 9.3k

$ 9.5,000

$ 9.9,000

US $ 10.1k

US $ 10.0k

$ 9.9,000

US $ 9.7k

$ 9.5,000

US $ 9.2,000

$ 8.9,000

(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 96 billion

The second stage is also known as the terminal value. This is the cash flow of the business after the first stage. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to their present value at a cost of equity of 5.6%.

Terminal value (TV) = FCF 2031 × (1 + g) ÷ (r – g) = US $ 15 billion × (1 + 2.0%) ÷ (5.6% to 2.0%) = US $ 431 billion

Present value of terminal value (PVTV) = TV / (1 + r) ten = US $ 431 billion ÷ (1 + 5.6%) ten = US $ 250 billion

The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is $ 346 billion. The last step is then to divide the equity value by the number of shares outstanding.

Compared to the current share price of US $ 53.9, the company appears to be fairly good value at a 33% discount from the current share price. The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not precise down to the last penny.

dcf

The hypotheses

Now the most critical inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. image of its potential performance.

Since we view Coca-Cola as a potential shareholder, the cost of equity is used as the discount rate rather than the cost of capital (or the weighted average cost of capital, WACC), which takes into account debt. In this calculation, we used 5.6%, which is based on a leveraged beta of 0.831.

Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.

Next steps:

While a business’s valuation is important, it shouldn’t be the only metric you look at when searching for a business. It is not possible to achieve a rock-solid valuation with a DCF model. Instead, it should be taken as a guide to ” what assumptions must be true for this stock to be undervalued? “Especially since our calculation landed higher than some of the institutional goals.

If a business grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output can be very different.

For Coca-Cola, we have compiled three relevant aspects to consider:

  1. Risks : Consider, for example, the ever-present specter of investment risk. We have identified 2 warning signs with Coca-Cola and understanding them should be part of your investment process.

  2. Management : Have insiders increased their stocks to take advantage of market sentiment about KO’s future prospects? Check out our management and board analysis with information on CEO compensation and governance factors.

  3. Other strong companies : Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid trading fundamentals to see if there are other companies you might not have considered!

PS. The Simply Wall St app performs a daily discounted cash flow assessment for every NYSE share. If you want to find the calculation of other actions, search here.

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material.

Do you have any feedback on this item? Are you worried about the content? Contact us directly. You can also send an email to [email protected]

About Myra R.

Myra R.

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