The following article is part of The Motley Fool's "Stock Madness 2005," a contest based loosely on the annual NCAA College Basketball Tournament, a.k.a. March Madness. From March 17 to April 4, our writers and analysts will engage in head-to-head competition with each other, advocating and arguing on behalf of 64 stocks we've selected as among the most interesting to Foolish investors. You, dear readers, are the fans and referees -- you'll read these exciting duels and then vote for the stock you think is the better investment... and should therefore move on to the next round of play. The company that survives six "games" will be our tournament champion, and its writer our most valuable "coach."
But, please, make no mistake -- "Stock Madness 2005" is a GAME!
Our writers are doing this for fun. They are enjoying the spirit of competition and the art of debate. They are delighting in the search for positives in the companies they've drawn... and negatives in the companies they're pitted against. They are NOT necessarily recommending these stocks as the ones they believe in above all others. As ever, YOU must decide whether the stocks we're writing about -- winners and losers -- are deserving of your investment dollars.
Coca-Cola (NYSE:KO)
Atlanta
, Ga.
$41.61
52-week low-high: $38.30-$53.50
$101.3 billion market cap
By Rich Smith
Round 2: Game on. Coke wins. Game over.
Gee, that was fast. We all knew Coke was a superior investment -- I mean, the company's been trouncing the S&P for nearly 120 years now. But how did it beat InterActiveCorp so quickly?
It's quite simple, actually. You're not watching a live sporting contest here, folks. You're watching a replay. Over the past six months, the Fool's own large-cap value investing authority, Philip Durell, has evaluated both of these companies for recommendation in his Inside Value newsletter. Coke got his vote. IAC didn't. When looking at the markets that IAC plays in, Philip weighed the company and found it wanting. Instead, he pointed his subscribers toward IAC's rival, Cendant (NYSE:CD).
And Coke? Well, it got Philip's vote over rival PepsiCo (NYSE:PEP). And just last month, Philip gave Coke top billing on his list of "Top Six Best Buys Now."
No surprise there. Just as we knew the winner of this contest before it even started, so, too, can we see which of these companies offers true and compelling value to investors. To borrow a phrase from the winner, "Coke is it." Just take a look at the companies' stats.
| Coke | IAC | |
|---|---|---|
| Net profits | $4.8 billion | $0.17 billion |
| Profit margin | 22.1% | 3.2% |
| Return on equity | 32.5% | 1.2% |
| Free cash flow | $5.20 billion | $0.96 billion |
| Dividend yield | 2.7% | none |
So Coke is the more profitable company. It's the better-run company. It generates five times IAC's free cash flow, and it's the only company of the two to pass some of that cash along to its shareholders at the beneficial 15% dividend tax rate.
As we stand on the brink of a new stock-market bubble and a return to recession (let's not kid ourselves; we all know it's coming), it's that last point that matters most. The average stock loses 43% of its value in a recession. Internet companies with minimal earnings like IAC fare worse than most -- and dividend-paying heavyweights like Coke fare best.
For market-beating returns in good times, and security in bad, obey your thirst for value. Choose Coca-Cola.
Fool contributor Rich Smith has no position, short or long, in any company mentioned above.
InterActiveCorp
(NASDAQ:IACI)
New York
, N.Y.
52-week low-high: $19.16-$34.62
$21.95
$15 billion market cap
By Jeff Hwang
InterActiveCorp or Coca-Cola? That's a good question. For an answer, let's go back to what Rich wrote in his initial argument for Coke:
"Why, if you purchased shares of Coke even as recently as 30 years ago, your investment today would have increased 25 times in size. Over that time period, Coke shares have appreciated at a compound annual interest rate of 11.5% -- a full percentage point ahead of the average S&P 500 stock, and remarkable for a company of this size."
And that's really the difference here -- size.
Coke carries a whopping $100 billion market cap; Barry Diller's IAC has a market cap around $15 billion. So to see returns as significant as those in the past, Coke clearly has a much bigger nut to crack.
In that regard, IAC and its fast-growing collection of Internet media businesses is just getting started.
On Monday, the company announced the $1.9 billion acquisition of AskJeeves (NASDAQ:ASKJ), adding the search company's 42 million unique users to IAC's 44 million. The acquisition seemingly ties together IAC's broad portfolio of Internet brands -- including Expedia, Ticketmaster, Lending Tree, and Match.com -- by putting an AskJeeves search box on the websites of all of the company's businesses. It's a great move that will improve the cross-marketing of its businesses products. More importantly, AskJeeves could potentially make IAC and its CitySearch property the player to beat in the fast-growing local-search market.
The stock is undervalued. In the short term, the spinoff of IAC Travel and TripAdvisor represents a potential catalyst for share appreciation as the value of IAC's properties becomes more fully recognized. In the longer term, IAC's growth will take care of itself.
Fool contributor Jeff Hwang owns shares of InterActiveCorp.
Who won? Go here to cast your vote.
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