Has Coca-Cola Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Coca-Cola (NYSE: KO  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Coca-Cola.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 12.6% Fail
  1-Year Revenue Growth > 12% 12.7% Pass
Margins Gross Margin > 35% 60.3% Pass
  Net Margin > 15% 18.3% Pass
Balance Sheet Debt to Equity < 50% 99.5% Fail
  Current Ratio > 1.3 1.11 Fail
Opportunities Return on Equity > 15% 25.8% Pass
Valuation Normalized P/E < 20 24.75 Fail
Dividends Current Yield > 2% 2.6% Pass
  5-Year Dividend Growth > 10% 8.6% Fail
       
  Total Score   5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Coca-Cola last year, the company has kept its five-point score. But investors have enjoyed a nice run-up in the stock over the past year, with its recent split coming as welcome news for many shareholders.

It's impossible to argue with the sheer brand power of Coca-Cola. As the top-ranked brand in Interbrand's global brand ratings for 12 years running, the company sells billions of servings every day around the world. Yet while Coca-Cola dominates the U.S., it still has plenty of room to grow in emerging markets like China and India, where per-capita consumption is far lower.

Of course, rival PepsiCo (NYSE: PEP  ) has the same goal of expanding strongly into emerging markets. But one thing that will make it easier for Coca-Cola to achieve its goals of doubling revenue by 2020 than for peers like fast-food giant McDonald's (NYSE: MCD  ) to grow overseas is its recent decision to streamline its corporate structure. By consolidating multiple international divisions into a single unit, Coca-Cola is grooming new managers for a future CEO role.

In addition, most of the concerns that hit Coca-Cola also apply to smaller competitors Dr Pepper Snapple (NYSE: DPS  ) and Monster Beverage (Nasdaq: MNST  ) as well. For instance, higher raw-ingredient costs have hit Coke hard, but Coke's superior distribution model allows the company not only to cut costs but also to force its rivals to use Coke as their distributor as well. That's clearly an enviable position for Coke to be in.

For Coca-Cola to improve, it needs to see Europe's slide end and for international growth to return to a stronger course. If macroeconomic trends work out in its favor, then Coca-Cola could get much closer to perfection in the years ahead.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Coca-Cola may not be perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Coca-Cola to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of PepsiCo, Coca-Cola, and McDonald's. Motley Fool newsletter services have recommended buying shares of Coca-Cola, PepsiCo, McDonald's, and Monster Beverage, as well as creating a diagonal call position in PepsiCo. 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 Fool has a disclosure policy.


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