Dead Money? Not Coca-Cola.

One of the most common arguments for why a stock is a poor investment is past price performance -- specifically, that a company's stock has stayed flat or gone down over some period of time. Critics have frequently employed that argument to describe Coca-Cola (NYSE: KO  ) , whose stock price hasn't budged over the past decade.

Coca-Cola was hardly the only company caught up in a bidding frenzy in 2000. During the frothy dot-com bubble, companies such as Corning (NYSE: GLW  ) , Juniper Networks (NYSE: JNPR  ) , and TTM Technologies (Nasdaq: TTMI  ) also reached astronomical valuations. All came crashing down from those heights, and each has yet to recover despite sporting much improved revenue and net income figures.

Digging deeper
One of the first reasons people give for Coca-Cola's unsuitability for investors' portfolios is that the stock price has gone nowhere over the past decade. Because of this, the thinking goes, the stock must be a bad investment today. Before we draw such a conclusion, let's look at the company's results over the past decade:

Metric

Fiscal Year 2000

Fiscal Year 2010

% Change

Net income

$2,177

$11,809

442.4%

Sales

$17,354

$35,119

102.4%

Market cap (end of fiscal year)

$151,112

$152,720

1.1%

Price-to-Earnings ratio

69.4

12.9

(81.4%)

Price-to-Sales ratio

8.7

4.3

(50.1%)

Source: Capital IQ, a division of Standard & Poor's.
All dollar amounts in millions.

The first thing that pops out is how fantastically expensive Coca-Cola was in 2000. The company ended the 2000 fiscal year trading at mind-boggling multiples of 69 times earnings and nine times sales. Those are rather high multiples to pay for a beverage company that was already fetching $151 billion at the time.

Fast-forward to 2010 and we see a different picture. Despite the market cap not going anywhere, a glance at the numbers actually shows that the company has performed quite well. From 2000 to 2010, Coca-Cola doubled its sales numbers while more than quintupling net income. Many people would be surprised to see that the company's numbers have gone up so much.

It's clear that those who badmouth Coca-Cola based solely on stock performance are not presenting the full picture. The company has continued to improve virtually every financial metric over the past 10 years. Unfortunately, investors' excessively high expectations still doomed the stock to failure.

All told, it took 10 years of a falling share price and improving earnings for the stock to finally trade at a reasonable valuation. Coca-Cola currently trades at 16.5 times 2011 expected earnings, much lower than it did a decade ago. That's not extremely cheap by any means, but it's much more realistic than before.

Foolish bottom line
The next time an investor points to a stagnating stock price as a reason for avoiding a stock, don't be swayed. One should examine a company's earnings power and its growth over time before making any claims that a company is unsuitable for investment. A falling stock price may signal dwindling earnings. But there's a chance it could instead reveal an extremely high past stock price that's reverting back to a more realistic level.

If Coca-Cola can continue to increase its numbers as it has in the past, the stock price should reverse the curse and move meaningfully higher. To keep up-to-date on Coca-Cola's progress, click here to add it to your free Fool stock watchlist.

Paul Chi has no positions in any of the companies mentioned in this article. The Motley Fool owns shares of Coca-Cola. Motley Fool newsletter services have recommended buying shares of Coca-Cola and TTM Technologies. Motley Fool newsletter services have recommended creating a covered strangle position in TTM Technologies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (12)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 11, 2011, at 1:37 PM, TimothyVR wrote:

    Pass that by me again?

    The P/E ratio was 69.4? 69.4? I had to write that twice.

    And investors kept buying as it moved past 30, 40, 50, 60.....

    What was the dividend yield?

    I started investing in 2005. I never knew the boom of the late 90s as an investor. I have had no hesitation at all buying KO before this article and this only provides another good reason.

  • Report this Comment On August 12, 2011, at 12:01 PM, TMFBabo wrote:

    @truth: Hey! I knew you were around on Fool.com articles and not just on CAPS. Always nice to see you.

    @TimothyVR: Yeah, hard to believe that a behemoth beverage maker could trade at 69 times earnings. I had to re-check that one. I never knew the boom of the late 90s either.

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