Episode 45 | A Taste of Coca-Cola’s Financial Profile

In Episode 45 of “Market News with Rodney Lake,” Professor Lake, Director of the GW Investment Institute, provides an in-depth analysis of Coca-Cola’s current financial and strategic position. He highlights the company’s strong brand, solid gross and net margins, and responsible capital allocation, particularly through consistent dividend growth. While Coca-Cola's valuation is in line with its 10-year average, concerns are raised about the company’s balance sheet, specifically its high debt levels and a modest interest coverage ratio of six times. The episode reminds listeners that while Coca-Cola remains a solid long-term holding for the GW Investment Institute, it requires close oversight from analysts and investors in the future.

Transcript

Thank you for joining “Market News with Rodney Lake.” This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the Director of the GW Investment Institute. Let's get started. Welcome back to “Market News with Rodney Lake.” I'm your host, Rodney Lake. Welcome back to the studio here in the GW School of Business right here in Washington, DC.
This is a GW Investment Institute to show. Remember, this is for entertainment purposes only and educational, not investment advice. Today we're going to cover a company that many people know and use their product every day called Coca Cola. The ticker is KO. And thanks for everybody for tuning in. If you're watching on YouTube.
And if you're listening on Spotify, Apple, Amazon. Thank you very much. If you're new to the show, welcome and welcome back if you're coming back. And so we're going to go over this company using the GW Investment Institute framework that all of our students use: the business, the management, the price valuation, the balance sheet on our fundamental analysis companies, on our quant funds, you know, our students work with model different models for that.
But today it's going to be a fundamental analysis. We're going to use the business, the management, the price valuation, the balance sheet, as we mentioned, the BMPB framework that's been so helpful for us to analyze companies over the 20 year history for the GW Investment Institute. And today we're going to go over Coca Cola. So, what's the set up for Coca Cola?
So I think everybody knows their products. But this is an enormous company. It has a strong brand, obviously global distribution. A lot of the sales are international. And so obviously people are going to be concerned about that possibly at the moment. But this is an excellent business, and it has been a stable business that has good margins.
And, you know, we'll gonna jump into this. So let's first just talk about the business. Coca Cola has a very strong brand, right? I think many people, and almost anywhere in the world knows Coca Cola. Now, they may not know all the brands that is owned by Coca Cola and all the things that they have bought over time.
But certainly they know the headline brands like Coke and Diet Coke and now Coke Zero diet, Sprite, as an example. Right. So many people know, okay, this is a software. It's not software. Soft drink company, not software. Soft drink company. And they identify with, you know, certainly those key brands, and they have, you know, they do the sponsorships.
And so they certainly know something about sales and advertising, as well. So, but let's talk about that business. So this business you're really trying to sell, you know, obviously, and grow at least as much as GDP. And when you have a global distribution empire like Coca-Cola, it sometimes is very challenging to continue to grow at the same scale.
And so, when you talk about the business, you have a good business, but you cannot very much, you know, continue to grow it at the same rates as they did in the past. So, let's start to break it down on the size of the company to begin with. So right now, beginning of May, here you are, you know, early May, talking about Coca Cola and this company's market cap, right now is 307 billion.
So, this is not, the largest company in the world. This is not a tech company. This is not Berkshire Hathaway as an example, but this is a very large company, 307 billion market cap. What else is important? So let's dive into some of the financials on the business side. Just so we get a sense of how big Coca-Cola is, what some of the growth rates have been on the business side.
So when we talk about revenue, the trailing 12 months through March, again, we're in early May, but through March, you're talking about $46 billion in revenue and growing at just under 2%. And in the past few years, you've had stronger growth numbers. You've had really big growth numbers in 2021, for example, 17%, 22%, 11%, 6%.
Then in 23 and then the trailing and then 24, for the full year, 24, you're at 2.4%. So you've really seen a decline in that growth rate. And now you're really sitting at kind of 2% for the trailing 12 months and projecting about 2.5%, for the full year 25. And analyst estimates have it around 5% for the full year 26.
And so, again, you've had this decline in growth on the business side. Part of that as as we are just talking about these, this these are enormous numbers when you're talking about, you know, revenue of $46 billion, it obviously is going to be challenging, to grow that number. Now, what are some of the good things about this business we talked about?
The excellent brand name, that's highly identifiable. But now let's talk about the gross margins. So the gross margins here, I slipped up and said software. But you would think with these gross margins, it could be a software type of company, because your gross margins are, you know, 61%. And that's been pretty consistent.
You're at 60 and then 57, 59, 60, going back over the last few years, since 2021. And so, these are very high gross margins. Now, that doesn't translate into exactly the same thing on the net side as big software companies. And again, this is a soft drink company. But you have net income margins of, 26% for the last, trailing 12 months through March, the latest data available, 2025, but going back very consistent in there.
So this is an excellent business. So when you talk about okay, how do we evaluate this business? Well let's look at the gross margins. Look at the net margin. Let's look at the brand. These are excellent. Now the only, you know, sort of ding that you would have here. The only thing you would say is well concerned about this area is on that growth side.
And part of that is well, you know, people don't drink if they drink one Coca Cola a day or a week or a month or whatever it happens to be, they don't tend to go from 1 to 10, right? They're not the same. People are not going to continue, to consume more and more. So it is a challenge.
So they have to think about, are we going to acquire other brands? How are we going to grow? Are we going to get in different businesses. And so that is something that for example, a competitor, PepsiCo, has got into the snack food business and Coca Cola has not really done anything of the same sort. So they've really been growing in the, in the core business, which is the software.
In the soft drink business, not software, soft drink business, and has been continued to grow there and has been more I wouldn't say a pure play there, because they're in a variety of different types of drinks and depending on how you want to say that, including energy drinks, as an example, but really have been taking a different strategy than, than PepsiCo, as a, as a big competitor.
And, you know, many people understand, PepsiCo and Coke are our competitors on on the top line. But certainly we talk about the snack portion of PepsiCo, very different, than than Coke. All right. So those are big numbers. Again, just a review to make sure we're on the same page. On the business side, we have the great brand.
We have the gross margins at 60 plus percent. We have the net margins at 26%. They have been consistent over the last five years that it's great. The the concern that we have on the business side now is, well, look, this is a problem on this growth rate, and we're going to have to really try to figure out how do we do the, how do we grow that?
And you know, part of what's been happening over this past year is that they're investing, they're deploying cash. The free cash flow in the past has been quite good. When you talk about what is it in 21? And again, looking at it over time in 2021, full year, calendar year is 11 billion and then 22, you're talking 9.5 billion, and then 9.7 billion and 4.7 has declined in 24.
But part of that is the CapEx. They've been putting more money over time into the business. So when you talk about the CapEx, that CapEx has gone up considerably. And, and the cash flow from operations has come down as well, and some of those years. And so it's a mix here. And so that's something we have to pay attention to.
They're certainly trying to invest a little bit more in the business. The last couple of years. They have dialed that up from 1.3 billion. On the CapEx side, 1.4, 1.8, 2 billion, and 2 billion for 24. And now, the trailing 12 months, and it's probably going to be about 2 billion for the full year 25. But, you know, part of that is that the cash flow for operations has has come down.
And so that that is something that, you know, we are going to be watching and concerned about. We are shareholders of Coca-Cola. And so generally that that has been good. But again, something that we have to pay attention to, something that we have to be concerned about and something that we need to stay focused on on the business side.
But this has been a great brand over time. This has been a long term hold for Berkshire Hathaway, which we recently talked about. And Warren Buffett has been a huge fan of Coca-Cola. And if you look at the, if you attended the annual meeting or you watch it online, you see that Buffett had both a regular Coke and a Cherry Coke, directly in front of him, for the Q&A portion of that meeting.
And so, certainly always advertising for the company. Always, you know, has been a long term shareholder in this company. He talked about that, a couple letters ago as well, in the Berkshire Hathaway annual letter. So now that's the business side. And we're going to pull it all together here at the end of the business to manage with the price valuation.
The balance sheet and we’ll score each one of those things. But let's talk about the company, first a little bit. So now let's move on, you know, to management. Management you know, has been excellent. You know, obviously there's there's been different people over time. James Quincey now is the is the chairman and CEO of the company. You know, the Coca-Cola has been very stable over time.
You have not seen, you know, maybe some people. And he's been there six years now. If you if people think back to so pre-COVID, if you think back to one of the major blunders of, possibly all time is the new Coke story, that that happened that's obviously way long ago. And many younger people might that are watching or listening, might not even know what that is.
But certainly, haven't had a big blunder like that for quite a long time. So one of the things that I think continues to be a concern, on the management's agenda is the health piece, you know, people trying to be healthier, the amount of sugar, that's in Coca-Cola and, and all of the other drinks as well is a big concern, for, you know, consumers.
And so if people want to be healthier and they want to access their drinks, are they offering different products? And they have been, and they've been trying to offer healthier things as well. But certainly there's still high demand for the things that are not quite as healthy and the positioning that. So I think that management's doing a reasonably good job.
They've been growing the company they've been keeping those margins high. And, and I think that the leadership at the company has gone through, these you know, sometimes I would call these, potentially difficult times to, to navigate through, well, you know, lots of people are concerned about, you know, diabetes is an example in the amount of sugar that's, that's in these drinks.
And so how do you navigate that? How do you provide the product to the consumer that wants that? But it also also be responsible on the public health side of that equation. And so I think they've navigated those waters relatively well. I don't think any management team is going to be perfect. But when you talk about the allocation capital allocation side, you know, I think they've been very responsible.
They, you know, the dividend yield right now sits at 2.86%. So relatively positive, dividend yield, they've been growing that very responsibly over the last five years at 4%. So I think you have to give fairly good grades. And on the acquisition side, you know, I've been responsible about going out and getting different brands. And, you know, these things are challenging.
You have to figure out, you know, what's going to be, let's say, interesting. What's going to be, you know, potentially a fad and distinguish what are those two things, and make sure you're not overpaying, for what's potentially a fad and something that, you know, is, going to be transformational and is actually going to add to your portfolio of drinks.
And so that that's not easy to do because some of these things can be faddish, for example. So again, on the capitalization side, I think that you give the, the growth piece a fairly good score. You give certainly the capital allocation on, you know, giving money back to shareholders on, on the dividend side, 2.86%, and and having that growing at 4%, very responsible there.
And we're going to come back and talk about scoring here in a moment, but let's move on. Now to the price valuation, for example. And so when you look at, okay, well, what's the current multiple on, on Coca-Cola, you're talking about 24 times is the forward PE right now. And again, this is early May.
This is not necessarily high or low. So when you talk about okay, well what's the historical ten year number for Coca Cola. The median is is around 23 times. So we're not especially pricey right here. This has not been something where you're like, okay, well, this is, this is really high. You know, they've traded as high in the last ten year period up to almost 30 times and as low as 19 times.
So you're really not high or low. Very much on the average PE right now for Coca Cola. And so it's not something that you're going to necessarily, get super excited about as you're getting a great deal or be too concerned that you're overpaying, if you're if you're acquiring shares right now. We're current shareholders of Coca Cola.
And we've been long term shareholders at the Investment Institute. Will continue to be at the moment. So I think it's important to think about, the valuation here, but it's not necessarily something that's going to be a determinant, and making a decision. It's not so overvalue and say, look, this thing has gone crazy. You know, it's trading.
If it was trading at 35 times, beyond the ten year, you know, high number, maybe we would be concerned. And if it was trading, you know, below, 19 times below the. Maybe we should be thinking about acquiring more shares. Now, if it's trading below 19 times, maybe there's something wrong, with the business, and we'd have to consider that.
But right now, you're really talking about you're trading on the average or the median for the last ten years and so on. So you probably give this score somewhere between the five and a seven. And we'll get to that. So this is not, you know, again, dramatically overpriced or underpriced. But that's where the ten year numbers are.
So we're we're not terribly concerned about that. Now when we talk about the balance sheet, this is this is where we probably have a lower score and we'll talk about that. But, you know, they have 13 billion in cash approximately at the end of March. And nearly 50 billion, 49 billion in debt. And so this is obviously, you know, a net debt situation, significant numbers, but they're generating free cash flow, in the past this year, not yet through the the March numbers, but expected for the full year to generate five, 5.8 billion for the full year of March.
I'm sorry, through the full year 2025 and 4.7 last year. So, not necessarily concerned about that on on the debt side. And so that doesn't make us sleep better at night. And certainly it's certainly it's not the case. We were talking about Berkshire Hathaway with, you know, over 300 billion in cash. And so that helps us really sleep well at night.
And one of the ratios that we encourage all of our analysts to look at, and you should be looking at as an analyst, as a business person, when you're looking at the balance sheet, if it is in fact a net debt situation, is the interest coverage ratio. In this case, Coca-Cola is at six times. That is not a great number.
And so this is where we would definitely give the balance sheet a little bit of a lower score at six times. It's not exciting for us. It's not something that's going to we're going to lose a lot of sleep about. Given the stability of Coca-Cola's business, given the global brand, all the things we mentioned about how great of a business it is.
But again, not something that we would prefer. And I think if we had a chance to talk to the management team, we would probably tell them that, you know, is there a way to improve this metric, obviously, without putting any, you know, detriment to the growth of the business? But how do we be more responsible? You know, getting this in that ten times would probably be preferable.
Net cash doesn't necessarily have to be for this type of business because it is a high cash flow business. And so but I think we would all sleep a little bit better if they get closer to ten times. On this interest coverage ratio. And that's EBIT over interest. And so that's earnings before interest and tax over the interest expense.
It's currently six times. And not not alarming but not helping us sleep better at night. Again if we were talking to management we would say hey let's get this closer to ten times. And so again balance sheet probably going to get an average score. So now let's go to start talking about all these, components together.
And so when we talk about the business again, this is a strong brand obviously historic brand, global reach, excellent margins as we talked about, you know, the 60, you know, plus percent, gross margins and the net margins in the 20s here. There is pressure here when we talk about from competitors, right? You certainly have people like PepsiCo as obviously, one of the most direct competitors, and people have choices.
And certainly when people really feel pressure, they, they trade down to possibly even store brands and private label as an example. But, you know, excellent. You know, you know, excellent return on equity numbers here at 40%. And the revenue growth has been excellent over the last five years, but let's say good, but not excellent. At, you know, roughly, you know, 7% average, let's say.
So the business is good, but not necessarily great. We look at the when we look at the numbers for the gross and the net margins and the return on equity. Those things are, those are excellent. But when you look at the growth, in that revenue that probably has been average. And again, you're talking 2% from the from the prior year, that's not really a tremendous growth.
And so probably going to give this business, you know, you're going to give the high sort of scores, to the components, on the gross in net margins, and then you're going to ding it on the revenue growth side. So you're probably talking about a seven. Then you talk about efficient capital allocation. The dividends the acquisitions.
Very strong track record. Again, that's why you get this return on equity, which is such a good number in the 40s. You know, they have aligned incentives, and they have done reasonably, a reasonably good job here. Again, they've been growing that dividend 4% very responsibly to pick out one piece of that capital allocation.
So they've been doing a good job there, maybe not the best job. And so maybe it doesn't deserve a nine. But you're certainly thinking here, in the neighborhood of seven. On the valuation side, this would be very much average. You know, we talked about it's trading right on top of the the ten year average, ten year median number here.
So you're not necessarily going to get too excited about that. The earnings yield, to use a metric from Joel Greenblatt, 4.8%. So this suggests a modest overvaluation if you're using that number but not, you know, if you're using the PE and you're looking at the ten year time horizon, you're probably going to give it, a modest score.
So probably something closer to like a six. Here. It is on the higher end. But it's certainly not near the all time highs, and it's really, average, with respect to its own ten year number. And it's pretty much, slightly higher, than the S&P 500. On the balance sheet side, I would say you're going to give it a ding here.
The credit rating still good though. You know it at an A+, but the six times interest coverage ratio is a concern, not something that we would, like to have, at six times rather have that interest coverage closer to ten times, to help us sleep at night. But, you know, they have great cash flow.
Again, this is a cash flow business, but so you're probably going to give the balance sheet, you know, between the six and the seven. So depending on how you total all those up you're going to weight those at 25% each. That's going to give you somewhere in the neighborhood of, you know, a seven, let's say, for that score.
And maybe it's between a six and a seven. If you're really harsh on some of these scores, but let's let's call it a seven. If you, massage all the scores appropriately. So good. Not great. This is a company that we own in the portfolio, so we're going to continue to watch this company. And again, this is a great business.
This is a good management team. The valuation is probably average. The balance sheet is, you know, something that is okay, but, you know, something that we have to watch. So Coca-Cola has been a longer term holding in our portfolio that the GW Investment Institute. Like Buffett, not as long term as Berkshire Hathaway and Buffett, but it is something that I do think that we're going to have to watch.
And so we've wrapped up for this semester. So for the fall, we're going to be asking our analysts, make sure we take a good look at Coca-Cola. It's been it's been an excellent hold in our portfolio. Again has this strong brand, has this recognition, has these gross margins, has these good net margins, has good return on equity?
Have they have been effective capital allocators. Good dividend yield. Price valuation okay. Balance sheet okay. So I think it's up to us to try to figure that out. And if you're, paying attention to this company it's something as an analyst, as a business person, as an investor, that you're going to need to think about. You know, many people love Coca-Cola, but what's going to happen from here?
You know, what are the acquisitions that they're going to do? What's the capital allocation? What is the growth strategy? You know, where is the revenue coming from? We didn't get deep into that. But a lot of it's international. That's something to think about and tackle. And but that'll be for another episode. So thank you. Remember this is entertainment.
And educational advice only. But that's a wrap for Coca-Cola and this episode of Market News with Rodney Lake. See you on the next episode. Thank you.
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