Coca-Cola Co: $KO Cash Flow Valuation Update

Current Price: ~ $71/share
Projected Yield: ~ 2.90%



Coca-Cola is the world's largest nonalcoholic beverage company. The firm, which sells a variety of sparkling and still beverages, generates 70% of its revenue and about 80% of its operating profit from outside of the United States. Coke's core brands include: Coca-Cola, Sprite, Dasani, Powerade, and Minute Maid. Following the asset swap with CCE, Coke now owns around 80% of its distribution in North America.           

Estimated WACC for the firm today is 6.43% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year	FCF $Millions
2002	3891
2003	4644
2004	5213
2005	5524
2006	4550
2007	5502
2008	5603
2009	6193
2010	7317
2011	6554

Average Annual Growth FCF: ~ 7%

CAGR FCF: ~ 6%

Consensus Forecast Industry 5-Year Growth: ~ 13% per year

Consensus Forecast Company 5-Year Growth: ~ 6% per year

Internal Growth Rate: ~ 6%

Sustainable Growth Rate: ~ 16%

Scenario 1
Average FCF (2011, 2010, 2009) is $6688 million

• Start at $6688 million FCF
• Assume a 5-year growth rate in FCF of 6% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	6688
1	7089
2	7515
3	7966
4	8443
5	8950
Terminal Value	147499

The firm's future cash flows, discounted at a WACC of 6.43%, give a present value for the entire firm (Debt + Equity) of $141037 million. If the firm's fair value of debt is estimated at $28600 million, then the fair value of the firm's equity could be $112437 million.  $112437 million / 2260 million outstanding shares is approximately $50 per share and a 20% margin of safety is $40/share.

Scenario 2
All else being equal,

• Assume a 5-year growth rate in FCF of 6% per year, then 3% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year	FCF $Millions
0	6688
1	7089
2	7515
3	7966
4	8443
5	8950
Terminal Value	276435

• Present Value of the entire firm (Debt + Equity): $235445 million
• Value of Equity: $206845 million or $92/share
• 20% margin of safety is $74/share

Sources

Morningstar.com

Yahoo! Finance

The Coca Cola Company

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.