Please ensure Javascript is enabled for purposes of website accessibility

Coca-Cola: Too Much Fizz in the Shares?

By Alex Dumortier, CFA - Apr 21, 2013 at 5:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Insiders sell $26 million worth of shares.

Reflecting fear of terrorism and concerns that the global economy may be slowing, the S&P 500 (^GSPC 2.47%) and the narrower, price-weighted Dow Jones Industrial Average (^DJI 1.76%) both fell 2.1% this week -- stocks' worst performance since November,

(KO 0.59%)

Chief Financial Officer Gary Fayard made the largest sale -- his first transaction on record -- exercising options to buy 224,000 shares that were set to expire no earlier than this coming December and selling the shares at an average price of $41. Coca-Cola's stock closed at $42.66 on Friday, up 1.3% on the day. Fayard continues to own 188,944 shares directly and 356,597 shares through his spouse and multiple trusts.

Are the shares now overvalued? As of Friday's close, they were valued at 26.7 times the trailing 12 months' normalized earnings-per-share. The last time they traded at a higher multiple was during the second quarter of 2008; here's how the shares have performed relative to the S&P 500 since then:

KO Total Return Price Chart

KO Total Return Price data by YCharts

The shares have smashed the index! Even on an absolute basis, they have handed shareholders a tidy return. If that performance is anything to go by, the shares can't have been significantly overvalued at the beginning of that period. (In fact, the average price-to-earnings multiple was higher than the current figure in every quarter from 1991 through September 2004, although, naturally, growth prospects were different then than they are now.)

While the recent insider sales are no cause for alarm, as the valuation inches up, Coca-Cola investors ought to be dialling down their return expectations. The shares -- along with those of other high-quality franchises -- have had a good run over the past several years. The odds that they will reproduce that performance over the next several years are decreasing.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$33,212.96 (1.76%) $575.77
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$4,158.24 (2.47%) $100.40
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$64.68 (0.59%) $0.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
356%
 
S&P 500 Returns
124%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.