The markets closed flat today, as investors waited and watched the first full day of Operation Iraqi Freedom. And like investors themselves, a jittery market jumped and dropped throughout the day with every development.
Despite the anxiety rippling through the country and the world, a measured reaction is necessary when it comes to your finances. The Fool offers timeless words of wisdom in our special feature, The Cost of War. Plus, you can share questions and concerns with fellow Fools in our Community. The war is today's Hot Topic.
In today's Motley Fool Take:
- Coke Says Cheers
- Quote of Note
- Let Uncle Sam Fund Your IRA
- Shameless Plug: Help With Taxes and More
- Cisco Heads Into Homes
- Discussion Board of the Day: Cheap Air Fares
- Quick Takes: El Paso Corp., Morgan Stanley, Starbucks, more
- And Finally...
After five years of stock market losses, Coca-Cola
From 2003 to 2007, management predicts cumulative cash provided by operations of $31 billion to $33 billion. We're talking about more than $6 billion annually, which is expected to be available for such goodies as share repurchases, dividends, and reinvestment in Coke's highly profitable beverage business.
At the midpoint of the expected range, Coke's cash flow over the next five years would represent growth of 62% over the $19.8 billion generated in the past five years. Alternatively, from the perspective of annualized growth, this prediction translates to an expected cash-flow growth rate of 10% per annum. For a business as mature as Coke's, this would be outstanding.
Coca-Cola's cash flow prediction was made in its recently released 2002 annual report. (Thanks to Foolish reader T.G. for this great observation!) In the all-important section on "Liquidity and Capital Resources" (found on page 22 of the financial section), management states:
We believe our ability to generate cash from operations to reinvest in our business is one of our fundamental financial strengths. We expect cash flows from operations to be strong in 2003 and in future years. For the five-year period from 2003 through 2007, we estimate that cumulative cash flows from operations will be approximately $31 billion to $33 billion.
It's somewhat surprising to see management offer this type of specific, long-term financial guidance, especially given its December 2002 decision to eschew quarterly earnings guidance. Nevertheless, take it as a clear sign that Coke management is confident that its business will be cranking out consistently higher cash in the years ahead.
This news should be refreshing for shareholders, who have suffered a horrible past five years. After years of predictable growth, Coke's stock got way ahead of itself in 1998, reaching an all-time high above $80 per share. At that price, the stock traded at a fizzed-up valuation of 67 times free cash flow. Since then, however, it's been a steady slide down to as low as $37 recently.
Today, at a price of 41.62, Coca-Cola is valued at 26 times 2002 free cash flow. This is not cheap, by any stretch, but it may be low enough that if cash flows grow as expected over the next five years, shareholders could earn something in the range of mid-single-digit average annual returns. That's not a whole lot to cheer about, but it's a marked departure from losses over the past five years.
"The art of war is simple enough. Find out where your enemy is. Get at him as soon as you can. Strike him as hard as you can, and keep moving." -- Ulysses S. Grant (1822-1885)
According to the Internal Revenue Service, through the end of February, the average tax refund received this tax season has been for $2,136, a 2.2% increase over last year.
We know the giddiness that accompanies a refund check from Uncle Sam. We can't help but think of all the possibilities: a cruise, a set of golf clubs, a rolltop desk, a week in the mountains... two grand can still buy a lot.
We don't want to discourage you from actually indulging in such luxuries, but may we suggest you put them off a bit -- say, 25 years?
In other words, instead of spending that refund now, invest that money in an individual retirement account (IRA), where the money will grow and help create truly golden years.
Someone who deposits $2,136 in a Roth IRA and is able to earn 8% a year for 25 years would add $15,679 to her nest egg. If her investment earns 10% a year (closer to the historical return on stocks, as much a faded memory as that may seem), that two grand would grow to $25,754.
It's not too late to fund an IRA for 2002. The deadline is April 15, even if you've already filed your taxes. However, if you choose a deductible traditional IRA instead of a Roth, you'll have to refile to get the deduction.
Don't know the difference between a traditional and a Roth IRA, or which is best for you? Looking for guidance on opening an IRA? Then visit our handy-dandy IRA Center. A quarter-century from now, when you're golfing in Scotland with your new clubs, you'll be happy you did.
Shameless Plug: Help With Taxes and More
With mere weeks left till tax D-Day, do you wish you could just pick up the phone and call a financial planner for some advice? With our TMF Money Advisor service, you can. Among many other benefits, you'll have an unbiased pro to speak to regarding everything from taxes to portfolio management to insurance. Sign up now!
Linksys is the most popular home-networking company, offering both wireless and non-wireless high-speed online products. It's a new field for Cisco, but one it's expressed interest in before.
The company will pay $500 million in stock for Linksys, which generated sales of $429 million last year. It's hard to tell if this is a better deal for Cisco than Linksys, but Cisco says the promise for the home-networking segment is huge.
Citing studies from research groups Dell'Oro and Synergy, Cisco claims the market for home- and small-office networking products could grow to $7.5 billion in 2006 from $3.7 billion last year.
There are some concerns about the purchase, including the margin deviations between Cisco's traditional business and the home-networking business. Cisco's gross margins topped 70% in the recent quarter, while gross margins for companies like Linksys trend around 30%. Cisco believes it can make Linksys' business more profitable, however.
Also, Cisco takes on new risks by entering a new market. Post-acquisition, Linksys will operate as a division of Cisco, keeping its brand. Cisco hopes to be rewarded for taking a chance by letting the home-networking company do its own thing, while providing new sales channels and outlets.
The deal will close in Cisco's fiscal 2003 fourth quarter, and will dilute earnings by no more than $0.01 in fiscal 2004.
Cisco's head of acquisition activities, Dan Scheinman, summed up the purchase and excitement surrounding it, saying, "Finally, a product my mother uses."
Are you ready to take advantage of industry discounting to fly somewhere this summer, or are you afraid to travel? Want to know who has the cheapest flights? All this and more -- in the Cheap Air Fares discussion board. Only on Fool.com.
El Paso Corp.
U.S. Energy Secretary Spencer Abraham is confident that the war with Iraq won't affect U.S. oil supplies. Despite reports that Iraq set fire to several oil wells, Abraham said OPEC members will more than make up for any disruptions in supply. The Bush administration can also tap the country's emergency oil reserves, if need be.
Ubiquitous coffee company Starbucks
Today on Fool.com:
- For updated stories throughout the day, bookmark our ever-changing News section.
- Jeff Fischer says generic drug makers are on the road to higher returns.
- Tom Jacobs warns to plan a margin of safety when buying a home.
- LouAnn Lofton breaks down inventory, an important balance sheet component.
- Troubled airlines and hotels loosen restrictions and cancellation policies.
- Bill Man says were it not for Enron, fallout from 2000 power crisis might fall on California's politicians.
- In Hot Topics, the war begins. For those with questions, here are many answers.
- In Fool's School, how to get negative information off your credit report.
Bob Bobala, Robert Brokamp, Mathew Emmert, Jeff Fischer, Tom Jacobs, LouAnn Lofton, Bill Mann, Selena Maranjian, Rex Moore, Rick Munarriz, Matt Richey, Jackie Ross, Reggie Santiago, Dayana Yochim