KO Coca-Cola Company (The)
Peerless beverage franchise, but priced for perfection; fair value likely below the current quote.
The story
Coca-Cola is an asset-light concentrate and brand franchise with unmatched global distribution through its bottlers, giving it pricing power and very high returns on incremental capital. It is a mature business: volume grows low single digits, and emerging-market expansion plus pricing and mix add a few more points. Refranchising has pushed margins structurally higher, but the current 37.5% includes favorable mix and some one-offs, so it should settle slightly lower.
Growth of about 5% (pricing plus low-single-digit volume) fades to 3.5%, below the 5.24% risk-free rate, over a 10-year horizon justified by a durable brand moat. Target margin of 34% sits between the pre-refranchising level and the TTM peak. Sales-to-capital is set at 1.8, not the reported 0.65, because the reported figure is swollen by acquisition goodwill and incremental concentrate growth needs little capital. Beta of 0.65 is near the 0.7 industry anchor for staples.
Value drivers
| Revenue growth (Y1) | 5.0% |
| Terminal growth | 3.5% |
| Forecast horizon | 10y |
| Target operating margin | 34.0% |
| Years to target margin | 4 |
| Sales-to-capital | 1.80 |
| Beta | 0.65 |
| Failure probability | 0.0% |
| Cost of capital (WACC) | 7.9% |
| Terminal WACC | 9.3% |
Valuation bridge
| PV of explicit FCFF | 110.45B |
| PV of terminal value | 137.08B |
| Equity value | 210.20B |
| ÷ shares → per share | $48.86 |
Projected free cash flow to the firm
| Yr | Revenue | Growth | Margin | NOPAT | Reinvest | FCFF | PV |
|---|---|---|---|---|---|---|---|
| 1 | 52.64B | 5.0% | 36.6% | 15.83B | 1.39B | 14.44B | 13.38B |
| 2 | 55.18B | 4.8% | 35.7% | 16.20B | 1.41B | 14.78B | 12.70B |
| 3 | 57.75B | 4.7% | 34.9% | 16.54B | 1.43B | 15.11B | 12.03B |
| 4 | 60.35B | 4.5% | 34.0% | 16.85B | 1.44B | 15.41B | 11.37B |
| 5 | 62.97B | 4.3% | 34.0% | 17.58B | 1.45B | 16.13B | 11.04B |
| 6 | 65.59B | 4.2% | 34.0% | 18.31B | 1.46B | 16.86B | 10.69B |
| 7 | 68.22B | 4.0% | 34.0% | 19.05B | 1.46B | 17.59B | 10.34B |
| 8 | 70.83B | 3.8% | 34.0% | 19.78B | 1.45B | 18.32B | 9.99B |
| 9 | 73.43B | 3.7% | 34.0% | 20.50B | 1.44B | 19.06B | 9.63B |
| 10 | 76.00B | 3.5% | 34.0% | 21.22B | 1.43B | 19.79B | 9.27B |
Key risks
- GLP-1 drugs and health trends eroding sugary drink volumes
- FX headwinds and emerging-market currency devaluation hitting reported USD revenue
- Tax litigation with the IRS over transfer pricing, plus sugar taxes and regulation
Catalysts
- Continued pricing power and premiumization (zero-sugar, coffee, alcohol-ready-to-drink)
- Further bottler refranchising and emerging-market per-capita consumption growth