Coca Cola. Probably the most ubiquitous brand in the world. The iconic company is so unique that it is almost impossible for the company to be mistaken for another. Yet a case of mistaken identity is what appears to be happening – at least in the stock market.
A very strange thing has been happing in the markets recently. The share price of Coca-Cola Consolidated (COKE) has rocketed from $180 at the start of the year to close to $400 today. This is an astonishing rise of 122% in under 5 months.
Naturally, curiosity got the better of me and I went to look at the accounts for COKE. What I found in the accounts does not appear to warrant this massive increase in share price.
Coca Cola Consolidate saw sales increase by 7.9% to $4.6 billion while income from operations dropped by 43% to $50 million. And considering half of the sales growth came from an acquisition, these results are nothing special.
The Enterprise Value for COKE is $4.8 bn made up of $3.7 bn of stock market capitalisation and 1.1 bn of debt.
From the above, you can see that COKE’s financials are sub par. The operating margin is a measly 1.5%. Even if you had to argue these margins are suppressed due to recent acquisitions and we triple the margin to give is income of $150 million, this in no way supports the current market capitalisation of the company.
The company is trading at close to 30x operating income. Nuts!
This is especially crazy when you consider that Coca Cola Consolidated is just a bottler locked into the Coca Cola system. They do not own the Coca cola brand. They only have rights to bottle the products in certain territories.
So why the Crazy rise in COKE stock?
What I fear is that many investors are mistaking Coca-Cola Consolidated (COKE) for the Coca-Cola Co (KO).
You see, on January 1 2019, Coca-Cola Consolidated changed its name from Coca-Cola Bottling Co. Consolidated.
This name change and the ticker symbol COKE is maybe confusing investors – particularly those that don’t do their due diligence and research.
So I think investors are buying the wrong stock. They are buying Coca Cola Consolidated (COKE) instead of the Coca-Cola Company (KO).
The Coca Cola Company (KO) is the company the actually owns the secret Coca Cola recipe and owns all the brands – and this is the company you hear most about. This is the company that has its headquarters in Atlanta. This is the company Warren Buffet owns share sin. This is the company that spawned many secret millionaires in a small town in Florida.
Coca Cola Consolidated (COKE) on the other hand is simply a bottler.
So what happens is that The Coca-Cola Company (KO) produces the concentrate which it then ships to the various bottlers around the world who then mix it with water, package it and sell it.
The bottlers all operate under their own jurisdictions. The Coca-Cola Company (KO) on the other hand operates on global scale providing the secret syrup.
The Coca Cola Company (KO) is a far superior business than its namesake bottlers. It has high operating margins, a geographically diversified portfolio, high free cash flow and is an asset light business. I personally own shares in The Coca-Cola Company (KO). I wouldn’t touch the bottlers.
I have previously written a post on this as many newbie investors get confused with the different businesses that have the Coca Cola name in the different markets. This is why it is alway important to do you research and due diligence before the purchasing any shares.
So there you have it. My attempt at explaining what is happening with Coca Cola Consolidated (COKE) share price. This is my theory only. Happy to hear your thoughts in why the stock price has risen so quickly over a short period of time.