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Editor's note: The "Should I Do It?" column runs every Wednesday and is written by David Peltier, our value stocks expert. In the column, David takes a look at a value stock and explains if you should snap up shares or pass it over.Peltier is a regular on RealMoney and also writes Value Investor.

On Tuesday,


(KO) - Get Coca-Cola Company Report

was upgraded to buy from hold at Merrill Lynch. According to


, that sent the buy/hold/sell matrix back to equilibrium, with a 9/9/2 count. The same source also lists the average analyst price target at $46.72, or some 14% higher than Tuesday's closing price of $40.90 a share.

That said, I will try to answer the nagging question: Should I do it? Does Coca-Cola, the world's largest beverage maker (50% global market share, 44% U.S. share), hold value at these levels? Even though the stock may look cheap on some traditional metrics, Coca-Cola may prove to be a value trap.

It's almost impossible to discuss a possible investment in Coca-Cola without comparing the stock to


(PEP) - Get PepsiCo, Inc. Report

. Both companies have market capitalizations of about $97 billion, but which stock is the better value?

Coca-Cola trades at 18 times expected 2006 earnings of $2.27 a share, compared with 20 times for Pepsi. Even so, Pepsi is expected to post 14.4% profit growth this year -- or slightly above its five-year compounded average of 13.3%. This matches up against the 4.7% expected earnings improvement for Coca-Cola in 2006, compared with its five-year compound average of 8.7%. The benchmark

S&P 500

, meanwhile, is currently trading at 15.7 times expected 2006 earnings, which are expected to grow 7%.

Coca-Cola is scheduled to post fourth-quarter results on the morning of Feb. 6. The consensus analyst estimate is for Coca-Cola to earn 44 cents a share on $5.4 billion of revenue. That represents a 3% earnings decline from the previous year, although management has consistently exceeded expectations in recent quarters.

TheStreet Recommends

Over the long term, management projects just 3% to 4% annual volume growth, with most of that coming from emerging markets like China. Pepsi is targeting similar growth in soft drinks, though it has dominated Coca-Cola in non-carbonated products -- Tropicana and Gatorade dominate Coca-Cola's Minute Maid orange juice and Powerade sports drink. Pepsi's snackfood division, with popular brands like Doritos and Lays, also set it apart.

To view David Peltier's video take on Coca-Cola, click here


It's also worth noting Coca-Cola offers a 28-cent quarterly dividend (2.7% yield), compared with Pepsi's 1.8% payment. Coca-Cola paid its last dividend in December, and will likely boost its payout for the 43rd consecutive year next month. The company can cover the current payment 2 times with expected 2006 earnings, which is at the low end of what I consider to be a secure dividend. Coca-Cola's yield is nearly a full percentage point above what the average S&P 500 stock offers. Still, I believe it will need to move closer to 3% before true value investors begin to take notice.

Analyzing the Upgrade

Merrill analyst Christine Farkas is looking for "continued market-share gains and volume growth" for the company. The analyst's upgrade note also cited a weakened U.S. dollar and a good innovation pipeline.

I have to take issue with both of these ideas.

Coca-Cola does receive about 80% of its revenue from overseas, and the dollar is down about 5% against both the euro and the Japanese yen over the past two months. Even so, I believe it's an awfully big leap of faith to stake an upgrade on foreign exchange considerations -- especially when management conceded at last month's analyst meeting that currency losses would cut Coca-Cola's 2006 earnings by 6%.

As far as expanding the pipeline, New Coke isn't the only Edsel-like failure in the company's history. Despite heavy marketing and promotion, the vanilla-, lemon- and lime-flavored products haven't lived up to the success of Cherry Coke. Same goes for C2 and Coke Zero, two recent "diet" offerings. Essentially, Coca-Cola has been unable to do much outside of top-selling brands Coke, Diet Coke, Fanta and Sprite without cannibalizing the core brand.

The company is struggling in Northwest Europe and India, but Farkas also foresees a potential near-term recovery in both Japan and Germany. The analyst also argues that Coca-Cola is trading below its historical price/earnings-to-growth (PEG) ratio of 2.5. I'd counter with my belief that Coca-Cola does not deserve an ultra-premium valuation merely because of its brand name. Maybe that was the case in the past, but the company's current growth prospects are nowhere near what they were in the 1980s and 1990s.

In my opinion, a stale consumer brand like

Campbell Soup

(CPB) - Get Campbell Soup Company Report

doesn't deserve the premium valuation that a large, growing market leader like

Procter & Gamble

(PG) - Get Procter & Gamble Company Report

gets. Similarly, what people don't realize is that Coca-Cola is also no longer the must-own franchise it once was. If anything, I'd argue that baton is about to be passed to Pepsi.

With that in mind, I believe it will be difficult for Coca-Cola to sustain a rally from the $40 level throughout 2006, implying a total return of less than 5% this year. On the other hand, I believe the stocks in the

Value Investor model portfolio can generate an average annual gain of at least 10%, which is why I think you


give in to the temptation to buy Coke.

David Peltier is a research associate at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

click here

to send him an email.