Drip Portfolio Report
Tuesday, October 28, 1997
by Jeff Fischer ([email protected])

ALEXANDRIA, VA (Oct. 28, 1997) -- The first company that we considered for the Drip Portfolio was an American classic -- the COCA-COLA COMPANY (NYSE: KO). The stock price has been driven high in this market and we admitted that the valuation was rich, but we also reminded that we have a long-term outlook and that dollar cost averaging will work in our favor. Still, that alone doesn't merit buying something that might grow at a rate slower than the market and that is already valued at a price that accounts for several years of market-beating growth, increasing the chance for disappointment.

After Coca-Cola announced that earnings would be slower-than-expected for the summer quarter, Randy looked at the numbers and found growth of operating earnings (not including the buying and selling of bottlers) to be around 5% to 6%. Coca-Cola does include the business of investing in bottlers as part of its operating earnings. It is part of business to them, but that type of earnings isn't what an investor buys the stock for or understands, and that type of growth is much less predictable or (arguably) consistently sustainable than steady top-line growth that comes from sales volume of the product itself.

The Drip Port first looked at Coca-Cola at $69 per share in August, and since then the stock has lost 19%, to $56. The stock still trades at 32 times 1998 earnings estimates, though, and earnings are only expected to grow 5% in 1998. (This year is anticipated to show 20% earnings growth over 1996.) The five-year projected growth rate remains 18% per year, which is the company's goal, but it appears that making this number might prove to be a formidable challenge over the next five years.

Two weeks ago the company announced results for its third quarter of fiscal 1997. Let's use a few columns to take a look-see, and see what we can find.

On October 16, Coca-Cola announced that worldwide unit case volume increased 11% over last year. Case volume is just one way to measure growth, but it's the best figure that we can use to measure Coke's product sales growth. The dollar amount of revenue and earnings that result from increased case volume, though, is of course much more important. Revenue rose 6% from the same quarter last year, and earnings per share rose 5%. Let's look at the numbers:

Coca-Cola Third Quarter, 1997

                       1997       1996      % Change
REVENUES              $4,954     $4,687           6
Cost of Goods Sold     1,659      1,814          (9)
GROSS PROFIT           3,295      2,873          15
Selling, Admin. and
General Expenses       2,052      2,419         (15)

OPER. INCOME           1,243        454         174
Interest Income           50          49          2
Interest Expense          58          67        (13)
Equity Income             46          56        (18)
Other Income - Net       224        445          ---

INCOME BEFORE 
INCOME TAXES           1,505        937          61

Income Taxes             494         (30)        ---
NET INCOME            $1,011     $  967           5
NET INCOME/SHARE      $ 0.41     $ 0.39           5

Shares Outstanding     2,478      2,492          (1)

Revenues rose 6% to $4.95 billion, and it is good to see that cost of goods sold dropped 9% and selling, administrative, and general expenses (SG&A) dropped 15%. But actually, that isn't all the result of improved efficiencies at the business, it's also the result of a good portion of the top-line revenue growth coming from the sale of bottlers. During the quarter the company sold a 48% interest in Coca-Cola Beverages to Coca-Cola Enterprises, 49% in The Coca-Cola Bottling Company of New York to Coca-Cola Enterprises, sold Coca-Cola Rhein-Rhur to Coca-Cola Erfrischungsgetranke AG (that's not a typo), and sold the remaining 25% interest it held in the Buenos Aires bottler to Coca-Cola Femsa. Tallied, these sales certainly are a considerable factor in accounting for top-line growth.

Perhaps contrary to the company's goal of accommodating shareholders, the earnings press release doesn't break down sales dollars in a complete manner. Unit case volume growth is given for each geographic region, but how much revenue growth came from beverage product sales and how much came from bottling investment sales isn't stated. Coca-Cola does share that its sales of interests in the four bottlers mentioned above accounted for $0.06 in earnings per share, or $148 million in after-tax income -- or 15% of total after-tax income. Without the income from the bottlers, earnings per share would have declined to $0.36 from $0.39 last year, and net income would have been $863 million compared to $967 million last year -- down 10.7%. We need to see what the company made from bottling investments in quarter three of 1996 in order to figure the year-over-year growth in earnings (or lack of) from the core business of selling beverages. We'll try to pour that drink tomorrow.

Fool on!

--Jeff Fischer

TODAY'S NUMBERS 

  
              Stock   Close    Change
              Intel  $85 3/4  +10 1/4

            Day   Month Year  History
        Drip:    +0.00%   0.00%  0.00% 0.00%
        S&P:     +0.00%   0.00%  0.00% 0.00%
        NASDAQ:  +0.00%   0.00%  0.00% 0.00%


        Rec'd   #    Security         In At      
       9/8/97   1      Intel         $94.69      

                          
                        Base: $800.00
                    Expenses: $ 55.50 (Moneypaper)
                   Purchases: See above
                        Cash: $649.10
                 Total Value: $735.00 apprx.

The portfolio began with $500 on July 28, 1997, adds $100 on the 15th of every month, and the goal is to have $150,000 by August of the year 2017.