Coca-Cola Bear's Rebuttal
by Rick Munarriz ([email protected])

With the utmost respect for my articulate counterpart, I'm afraid Louis has fallen into a familiar Coke bull trap. Living in Atlanta near the mothership will do that. He declares Coke's business to be "recession-proof." True, the business may very well be, but the stock certainly is not. A portly broker may have been downing a Tab while he saw shares of Coke slide 25% on Black Monday. It bounced back, but, then again, Coke's P/E multiple was in the teens then. Coke has been seen as a defensive stock to the point where the valuation has grown "offensive."

Louis naturally never got around to going beyond the open-ended nature of the future. He talks about the rise in case volume without explaining that prices paid by consumers last year were 2-3% lower than the year before. That is because there will always be competitors (like Pepsi), generics (like Cott), and new entrants (like Virgin Cola) to keep this unusually high-margin craft honest.

He also glosses over emerging markets, many of them full of starving citizens, as perfect candidates to pay up for carbonated nirvana. Sally Struthers has apparently had it wrong all along. It is not only a bit elitist to assume that all nations will embrace the turn of the century creation of American soda jerks as the beverage of choice, it is also simply not financially feasible in many parts of the world.

Besides, beyond its namesake and Sprite, Coke is hard-pressed to be a niche leader elsewhere. PowerAde is no Gatorade. Fruitopia is no Snapple. Surge is no Mountain Dew. As a root beer buff, I would rather down a Stewart's or an IBC, or even a Hires or A&W before I would settle for Barq's.

The ultimate bullish case, that falls flat like a Diet Coke can open for hours, is when Louis justifies an investment in Coke by comparing the 18% earnings growth rate of the past to a bond yielding 6%. This is a meaningless puzzle unless one adds in the most crucial variable, the price of that yield. For that bond you would probably pay par. Your $1,000 would earn you $60 a year, or a 6% yield. Today, with Coke at $78, investors are paying $1000 for a stake in Coke that will only earn a projected $21 in the year ahead, or a 2% yield. Showing my math, $1000 will buy you 12.8 shares of KO. Each share will earn $1.65 this year -- in sum, $21 and change (or 2.1% of $1000).

That's right. Despite an impressive record of raising its dividend in each of the last 35 years, the shares have overshot that to the point of yielding less than 1%. Coke just can't afford to return much more than that. If the yield were to bump up past 2%, all of the annual earnings would be mailed out in quarterly dividend checks.

Of course, if you keep compounding 18%, relative to a flat bond, and, if all goes well, seven years from now, hello 6%. But will all go well? Coke started out the new year with single-digit quarterly revenue growth and lower earnings. If the future holds 8% earnings growth, and not the merry 18% of the past, it will take 18 years to get to that 6% earnings yield. Plop, plop, fizz, fizz.

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