Passing Coke
Into the final round

by Jeff Fischer (TMF Jeff) (TMF Jeff)

Alexandria, VA (August 9, 1999) -- Coca-Cola (NYSE: KO) should learn by October whether or not its proposal to acquire French soft-drink leader Orangina from Pernod-Ricard will fly, but more interesting to Drip Port readers and to the world at large is whether or not Coca-Cola advances to round two in our food and beverage study.

Brian and I and the rest of the free world are impressed by Coca-Cola's business model and profitability, but we have concerns about its growth prospects and -- in relation to that -- the stock's valuation. We want market-beating appreciation from our investments.

Coca-Cola has beaten the market in twelve of the last eighteen years, and typically by a wide margin as Brian showed on Friday. However, that's history. (Note the incredible advance that Coca-Cola had from 1988 to 1991 following Warren Buffett's purchase at 2 times sales. In 1988, the stock rose 20.6%; 1989, 77.3%; 1990, 22.6%; and in 1991, it rose 75.4%.) Now Coca-Cola is priced at 8 times sales, not 2, and earnings growth is flat, not soaring, which leaves us wondering if share price appreciation will surface again in a magnitude that could impress Superman, or even Aqua Man. Or not.

Coca-Cola is valued at $150 billion. If the company's valuation grew 15% annually the next 10 years, it would be valued at over $600 billion in 2009. That's a lot of Coke. That is $100 worth of value per person on the planet. Can it happen? Anything can happen. Microsoft (Nasdaq: MSFT) recently had a valuation of $500 billion, making General Electric (NYSE: GE) look small at $347 billion. However, can we reasonably begin to buy the stock now and hope for 15% share price appreciation year after year?

Yes or no, most Fools believe that Coca-Cola should be a holding in the Drip Portfolio. On our message board, a majority of posts are positive regarding the very long-term prospects for Coca-Cola, especially internationally. For example, GLSmyth answered a post that question Coca-Cola's new marketing (or lack of it) and the abilities of CEO Douglas Ivester. The concerns arose from a former Coca-Cola employee. Here is the question as it was posted, and here is GLSmyth's response.

Another interesting post came from Taylor (tmackfool), who wrote about Coca-Cola sales in remote parts of Central America, where he has been working.

Other great thoughts were shared by pantandemma, who fears that overseas growth has hit roadblocks and Coca-Cola needs overseas growth to fuel growth period. Read the post here. Many other Fools shared excellent thoughts, some doubtful, but many positive for the long term. To read the community's thoughts, please visit the Drip Companies board.

Needless to say, we share your enthusiasm for Coke's business (that's not a revelation from us) and the company will advance to round two, which should be our finalist round, depending on how many companies make the cut. (I imagine that three or four companies will advance at most.) Meanwhile, we should hope that Coca-Cola stock continues to descend and thereby offers more value for new and recurring investors who have yet to make the bulk of their investment in the company.

So, despite abounding questions, Coca-Cola now moves to our finalist list for a close comparison against our other eventual finalists. Our next food and beverage company on the table is PepsiCo. (NYSE: PEP), which we'll deal with later this week. To post thoughts on the company beforehand, please visit the Drip Companies board linked above. To read our past thoughts on the company, visit our food and beverage study page from last year.

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8/09/99 Close

Stock   Close     Change
JNJ     93 1/16   +1 1/8
INTC    73 7/16   +1 7/8
CPB     44 5/16   +9/16
MEL     33 5/8    +1/2
               Day     Month       Year     History
Drip           1.89%     3.26%     9.04%     24.01% 
S&P 500       (0.19%)   (2.33%)    6.16%     38.26% 
Nasdaq        (1.14%)   (4.53%)   14.88%     58.05% 

Last Rec'd  Total#  Security  In At    Current
 05/03/99   8.134    CPB     $52.793   $44.313
 07/01/99  21.066    INTC    $41.861   $73.438
 03/09/99   9.076    JNJ     $74.910   $93.063
 06/07/99  22.453    MEL     $33.488   $33.625

Last Rec'd  Total# Security In At   Value    Change
 05/03/99    8.134   CPB   $429.42  $360.44  ($68.98)
 07/01/99   21.066   INTC  $881.84 $1547.03  $665.19 
 03/09/99    9.076   JNJ   $679.89  $844.64  $164.75 
 06/07/99   22.453   MEL   $751.91  $755.00    $3.09 

Base:  $2800.00
Cash:    $24.29**
Total: $3531.38

The Drip Portfolio has been divided into 113.904 shares with an average purchase price of $24.582 per share.

The portfolio began with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to have $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging, we don't expect to seriously challenge the S&P 500 for the first 3 to 5 years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. (NOTE: our investment in Campbell Soup is all but frozen due to fees instituted in its DRP plan.)

**Transactions in progress:

7/26/99: Sent $100 to buy more JNJ.