The Power of Earnings: Coca-Cola

Chartists, momentum investors and palm readers may disagree, but at The Motley Fool, we know that a stock is worth only the cash flow its underlying business generates. But as investors, how do we know whether we're buying those cash flows on the cheap, or paying too much for future expectations?

Try using the earnings power value (EPV), a quick way to calculate the value of a company's current earnings. Once we've crunched the numbers, we can then compare the EPV to a company's stock price to determine the value that investors are giving its earnings growth. Then you can make the call if it's worth paying up for that future growth.

If you're new to the EPV way, check out our primer and spreadsheet here. Don't worry: You don't need a Ph.D. in finance -- just a few numbers you can easily find at Fool.com. Let's take a quick look at the EPV for Coca-Cola (NYSE: KO  ) .

First: What it does
The world's largest beverage company and most valuable brand, Coke's roots go back all the way to 1886. The original Coca-Cola soda fountain drink, invented by Dr. John Pemberton, has expanded to more than 3,300 soft drinks, waters, and juices.

Second: The value of today's earnings
Using our handy EPV primer from above and a 10% discount rate, we get the following for Coke:

EPV Cash Flow (TTM)

Current Earnings Value Per Share

Current Stock Price

Value of Growth Per Share

% Growth Implied in Stock Price

$7,785 million

$30.50

$56.75

$26.25

46%

TTM = trailing 12 months.

Third: Is it worth it?
We're not surprised to see that growth accounts for about 46% of Coke's stock price. Coke has generated enviable results over its history. Over the last five years, for example, Coke has grown revenues and earnings by about 7% and 9% per year, respectively. That's not easy to do when you're a company as big as Coke. Coke's international expansion opportunities bode well for growth in future years. Analysts expect 13% earnings growth this year and 8% growth next year.

Fourth: Coca-Cola's EPV vs. 3 Competitors
Let's see how Coca-Cola stacks up against three other companies playing in the beverage industry. Running these three companies through our EPV calculator gets us:

Company

Current Earnings Value Per Share

Current Stock Price

Value of Growth Per Share

% Growth Implied in Stock Price

PepsiCo (NYSE: PEP  )

$34.55

$65.90

$31.35

48%

Dr. Pepper Snapple (NYSE: DPS  )

$24.10

$36.87

$12.77

35%

Hansen Natural (Nasdaq: HANS  )

$25.00

$44.69

$19.69

44%

Interestingly, the beverage industry in general seems to be pricing in significant growth. We're confident that Coke has plenty of growth avenues to pursue, plus we love that fact that it's a cash flow machine with a rock-solid balance sheet. 

Remember, EPV is a handy tool to see what price investors are putting on a company's future, but it's just a starting point. 

Is Pepsi a better value than Coke? Let us know which stock looks best to you by posting your opinion down below.

At the time of publication, Ron Gross owned shares of Coca-Cola. Ron is advisor of the Motley Fool Million Dollar Portfolio. Coca-Cola is an Inside Value pick. Hansen Natural is a Rule Breakers recommendation. Coca-Cola and PepsiCo are Income Investor recommendations. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Coca-Cola. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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