ALEXANDRIA, VA (Sept. 10, 1999) -- Continuing where we stopped chewing on Thursday, we end the week comparing performance measures and preparing to run a discounted cash flow model on Wrigley (NYSE: WWY), a company that qualifies as an excellent, high-quality business in our opinion.

Our food and beverage finalists so far are Coca-Cola (NYSE: KO), PepsiCo (NYSE: PEP) and Wrigley. Before we move to our next contender, we want to further compare these three companies side-by-side on some key metrics. As our study progresses, we will add other companies to this comparison and arrive at a full array of comparisons that will assist us in our later decisions. Our final goal is to find one of the highest quality businesses in the industry and ideally find it at a moderate price. The business quality is more important, however.

Regarding quality: Wrigley has it like a school chair has gum stuck to it. Past success can sometimes be the best indicator of future potential, and Wrigley's recent past is as shiny as its distant past (as we'll show in a table below). Since 1987, Wrigley's stock has gained ground every year except one (1991). The company's earnings per share (EPS) have done likewise, dipping only once (1995). The dividend has increased every year except 1996 (I'm looking into that), and the company's book value has just as steadily risen.

Let's talk book value a moment. Book value is literally the value of a company that can be found on the accounting ledger. To calculate book value per share, divide a company's shareholder's equity by the number of shares outstanding. Shareholder's equity can be found on the company's balance sheet. It is simply the difference between total assets and total liabilities held by the company. Shareholder's equity is "accounting's" way to represent the assets that have actually been generated by the business.

One of the most common ways to present shareholder's equity is in a per share value, which is called -- taking us back to topic -- "book value." Book value is the amount of shareholder's equity per share. If a company were being sold for parts, accountants would state that the book value is what it was worth before considering its market value or the more abstract intrinsic value. Book value is typically overshadowed by market value and intrinsic value. In many ways, market value is king, although it is a "fluctuating" king while book value is, in effect, in power at all times. Book value is always a certainty. It is what it is.

I'm taking the time to address book value -- which is not a key measure in how companies are eventually valued on the market (consider America Online's $2.75 book value, and Amazon's $1.70) -- because it is interesting to me that Wrigley has grown its book value (shareholder's equity) more than Coca-Cola since 1989. The reasons for this include Wrigley's growing retained earnings, consistent dividend payment of 50% of net earnings, and zero debt, and anyway one can't assume that a business is superior based on book value alone. Some of the poorest businesses sport high book values but no growth potential. However, these numbers will merit a deeper look into Coca-Cola's and Wrigley's shareholder's equity and book value specifics before the close of our study.

Since 1989, Wrigley's book value has grown 242% and Coca-Cola's has gained 164%. Over the same period, Wrigley's EPS has expanded 192% and Coca-Cola's EPS has grown 162% (Take that, Coca-Cola!). Wrigley's dividend payment has increased 146% and Coca-Cola's has gained 252%. The point to remember with this last comparison is that Wrigley already paid 50% of net earnings in dividends in 1989, and Coca-Cola paid just 31%. Wrigley has kept its dividend at 50%.

Also of some interest in the tables are the trading ranges compared to the P/Es. Wrigley's low was in 1989, at a P/E of 13. Over the years, it has averaged a P/E of 23.3. It is now at 25.8 times year 2000 estimates. At its low, Coca-Cola sported a P/E in 1989 of 10 (great opportunity, eh Mr. Buffett?). Over the past 10 years, Coca-Cola's P/E has averaged 28.9. At $55, the stock is now at 35.2 times year 2000 estimates.

I've rambled enough. The tables, please...

                 Wrigley, in $0.00

      Closing     P/E
FY     Price    High/Low   EPS      Div.  Book Value
1998   89.56    41  28     2.63     1.11     9.96 
1997   79.56    35  23     2.34     1.00     8.50 
1996   56.25    30  23     1.99     0.85     7.74 
1995   52.50    28  22     1.93     0.96     6.87 
1994   49.38    30  22     1.98     0.90     5.92 
1993   44.13    31  20     1.50     0.75     4.94 
1992   32.63    31  17     1.21     0.62     4.27  
1991   26.89    25  15     1.09     0.55     4.64 
1990   17.07    20  15     1.00     0.49     4.02 
1989   17.86    20  13     0.90     0.45     2.91 
1988   12.03    --  --     0.73     0.36     --
1987   11.51    --  --     0.56     0.28     --
                 Coca-Cola, in $0.00

      Closing     P/E                
FY     Price    High/Low   EPS      Div.  Book Value
1998   67.00    63   38    1.42     0.60     3.41
1997   66.69    44   30    1.64     0.56     2.96
1996   52.63    39   26    1.38     0.50     2.48
1995   37.13    34   21    1.17     0.44     2.15
1994   25.75    27   20    0.98     0.39     2.05
1993   22.31    27   23    0.83     0.34     1.77 
1992   20.94    37   29    0.62     0.28     1.49
1991   20.06    34   18    0.60     0.24     1.67
1990   11.63    24   16    0.50     0.20     1.44
1989    9.66    19   10    0.54     0.17     1.29

(Numbers compiled from Hoover's subscription content.)
I have rambled too much and we're not going to get to a discounted cash flow model today, but we will on Tuesday next week. For that, as we'll explain, we'll need Wrigley's return on equity numbers. Here they are since 1991:

WWY Return on Average Equity (ROE)
           1998    28.4% 
           1997    28.9%
           1996    27.2%
           1995    30.1%
           1994    36.5%
           1993    32.6%
           1992    29.4%
           1991    29.8%
         Average   30.3%
ROE is considered one of the more important measures for a company in that if a company is consistently generating a high return on equity, it is likely to be at worst a stable, consistent investment, and more often a market-leader of some merit. Wrigley fits the later description. Its ROE is consistently respectable and the stock has been a leader. Wrigley's ROE has dipped the past few years, as Brian noted, in part as new investments were made in overseas production. We'll use the 30.3% average ROE in next week's model.

Before we kiss today good-bye, let's begin a number comparison between our leading contenders. All numbers (as we build this list) will be as of last year (1998) as long as there are no extraordinary factors. If there are, we'll use the latest quarter or six months and annualize where appropriate.
              Coca-Cola    PepsiCo     Wrigley
ROE               35.0%      31.7%       28.4%
ROIC              31.2%      23.0%       24.5%
Gross Margin      70.4%      57.3%       57.7%
Operating Margin  26.4%      12.9%       20.6%
These companies are fairly close to one another in these measures aside from Pepsi's lower operating margin, which is now rising. If you have questions following this column, please visit the Drip Companies message board. Until next week, have a great September weekend and Fool on!