Second submission to Whopper Investments valuation and analysis challenege

This challenge is Coca Cola (KO) before Warren Buffett bought in 1989.  Since I have studied KO quite a bit, I know what they ended up doing, and why they made some of the decisions that they did.

Since I have studied Coke quite a bit, I will not go into detail on what I would have done too much.  All that I will say, is that I would have done what they did ended up doing and consolidated, sold off non-core businesses, and concentrated on the core business of selling, distributing, producing, and expanding the market of the Coke syrup and the Coke brand around the world.  With an emphasis on expanding internationally.

I would have treated them in the same way I am treating Vivendi now, which I detailed in my Seeking Alpha article on them.  The major difference between the two companies is that Coke is a producer of some of the major assets, and Vivendi is not.

Valuations:

All numbers are in millions of US dollars, except per share information, unless otherwise noted.

  • 1988 revenue-$8,338
  • Multiplied by:
  • Average 3yr EBIT margin of:16.45%
  • Equals:
  • Estimated EBIT of:1,371.6
  • Multiplied by:
  • Assumed fair value multiple of EBIT: 8X
  • Equals:
  • Estimated fair value EV of KO:10,972.8
  • Plus:
  • Cash and Short term investment of 1,231
  • Minus:
  • Total debt: 2,124
  • Equals:
  • Estimated fair value of common equity: 10,079.8
  • Divided by:
  • Number of shares of 365
  • Equals:
  • A per share price of $27.62

That is the very low estimate of value.  I would only have used this estimate as my base case if we were in some kind of recession or depression.

  • 1988 revenue-$8,338
  • Multiplied by:
  • Average 3yr EBIT margin of:16.45%
  • Equals:
  • Estimated EBIT of:1,371.6
  • Multiplied by:
  • Assumed fair value multiple of EBIT: 11X
  • Equals:
  • Estimated fair value EV of KO:15,087.6
  • Plus:
  • Cash and Short term investment of 1,231
  • Minus:
  • Total debt: 2,124
  • Equals:
  • Estimated fair value of common equity: 14,194.6
  • Divided by:
  • Number of shares of 365
  • Equals:
  • A per share price of $38.89

This is what I would have used as my base case estimate, and the value I think that is probably closest to the actual share price at that time.

  • 1988 revenue-$8,338
  • Multiplied by:
  • Average 3yr EBIT margin of:16.45%
  • Equals:
  • Estimated EBIT of:1,371.6
  • Multiplied by:
  • Assumed fair value multiple of EBIT: 14X
  • Equals:
  • Estimated fair value EV of KO:19,202.4
  • Plus:
  • Cash and Short term investment of 1,231
  • Minus:
  • Total debt: 2,124
  • Equals:
  • Estimated fair value of common equity: 18,309.4
  • Divided by:
  • Number of shares of 365
  • Equals:
  • A per share price of $50.16.

This is what I would probably estimate the intrinsic value to be, probably still a bit too conservative.  I would have wanted at least a 30% margin of safety to that, so I would have bought around $35 per share.

The margins are incredible.  Revenue, EBIT, and gross growth rates are very good.   Best of all, even then they had dominant competitive advantages and positions in the soft drink market.

They had huge opportunities for growth outside of the US.  They had more suppliers and distributors coming online all the time.  They were improving relationships with the local economies.  They had dedicated people willing to go to extremes to sell the product.  More importantly they had customers who were buying more and more Coke every year.  Meaning they could make more money from each can they sold overseas.

I would have been constantly evaluating my investment thesis and waiting for a buying opportunity.

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