The Ultimate Rule Maker: Coca-Cola

Beverage giant Coca-Cola (NYSE: KO  ) has my vote for the company that best defines what Rule Making investing is all about. At its current price, it may not qualify as the best investment out of the companies you'll be reading about, but understanding what makes it the quintessential Rule Maker can put Fools in a capacity to place some chips on the table when a depressed Mr. Market rears his ugly head.

I recently highlighted the characteristics that set Coke apart from its archrival PepsiCo (NYSE: PEP  ) , another Rule Maker by most important metrics. Coke's only knock is that it's lost a bit of its growth appeal in recent years as domestic consumers increasingly embrace non-carbonated beverages with less sugar content. Coke has belatedly caught onto this phenomenon but hasn't skipped a beat internationally. In total, it still meets or exceeds its archrival on a number of fronts and can compete with nearly any Rule Maker out there. Here's why.

A leading brand
On to why Coke qualifies as the definitive Rule Maker. Let's start with leading brand -- Coca-Cola is the leading brand in the world according to Business Week magazine and is worth close to $70 billion. That's over 60% of Coke's total stock market capitalization and, although open to interpretation since we're talking about an intangible asset here, speaks to what Coca-Cola means on a global scale. Rule Maker investing isn't just about the U.S.; to make the list, a brand must be widely embraced internationally. And I would be hard-pressed to find another brand name that comes close to matching Coca-Cola. Archrival Pepsi doesn't even come close, and other global brands such as McDonald's (NYSE: MCD  ) , Toyota (NYSE: TM  ) , and Nike (NYSE: NKE  ) are valuable but still don't reach into far-flung countries where Coke has existed for decades.

Mass market, repeat purchase
Next up is mass market, repeat purchase. Along with food, beverages are arguably the most consumed substances on the planet. And while sugar water clearly isn't a necessity, Coke still sells plenty of it on a daily basis and has come around to the realization that it can sell Dasani water just as easily as soda, as it can with orange juice (Minute Maid), sports drinks (PowerAde), and newly popular energy drinks (Full Throttle).

Thinking through who could dethrone Coca-Cola from this category, Starbucks (NYSE: SBUX  ) is high on the list but has only begun to tap international markets, and Gillette stands tall but is now part of Procter & Gamble (NYSE: PG  ) and its stable of impressive consumer brands. Still, none is as impressive as the Real Thing.

The financial picture
Turning to financial aspects of Rule Making, Coke has posted very strong historical performance when looking out over the past decade. Its five-year track record is a bit weaker, but fortunately, Rule Maker investing takes an even longer time frame to ferreting out successful candidates. And cash is definitely king at Coke; it consistently posts net profit margins in excess of 20% and has posted an even more impressive 25% return on invested capital in recent years. That's as high as you'll find at any company.

Does Coke have a strong financial direction? Growth investors may not think so, but there's something to be said about the stable, visible results it has been able to post throughout the years. And Coke may be getting its mojo back; fellow Fool Tim Beyers recently detailed that management is beginning to make strides in bringing successful new products to market, something that PepsiCo long ago instilled in its corporate culture.

The Foolish bottom line
Valuation is a key consideration to make in deciding if a company qualifies as a long-term buy and hold, but at the right price, Coca-Cola certainly should make the cut, as it will continue dominating its industry for years to come.

Now go back and read about the other contenders for the best Rule Maker. For more stock ideas, visit Motley Fool Inside Value, where we identify industry leaders trading for bargain prices. Try Inside Valuefree for 30 days.

Fool contributor Ryan Fuhrmann is long shares of Starbucks and Nike but has no financial interest in any other company mentioned. Starbucks is a Stock Advisor recommendation. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.


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