Unscrambling Monday's Egg

KO's Knocking Out the Chicks' Dozen

Putting Coke through the Chicks' Dozen
by Chick Kristin

Wow, my first article opportunity for the Chicks' website. This reminds me of the days when I used to do my homework on Sunday in front of the fire, while the Packers played in the background. OK, so you've guessed, I'm the cheddarhead from Wisconsin, but now you might think I'm the geeky cheddar-head - I really did love doing homework.

I bring up the Packers because watching the game was a Sunday tradition for my family, along with nachos, and of course, Coca-Cola (KO: NYSE). That fizzy, tickle-your-nose pop was as common in our household as was milk in a dairy farmer's. We bought Coke weekly; no Pepsi products for us thank you very much. In fact, do you remember when Coca-Cola introduced the new Coke product that was supposed to taste better than original Coke? If not, lucky for you, as my family suffered during that time. See, in our opinion, the new Coke was nothing more than Pepsi bottled in a fancy, shmancy new Coke can. Thanks to the Coke gods for seeing the error of their ways.

OK, onto the task at hand. In spite of KO's recent changing of the guards and public relations' catastrophes, does KO still have what it takes to be in the Chicks' Dozen? Read on and see.

KO & THE CHICKS' DOZEN

1. Buy What You Know

Coke Is It, The Real Thing, Enjoy! Did you watch the Olympics? Do you live in Atlanta where every soda you drink is a Coke - orange Coke, white Coke, Diet Coke? Do you Powerade? And who can't forget, (dating myself,) the "I'd Like to Buy the World a Coke, and Keep It Company" song? Let's face it, Coca-Cola owns 51% of the world's carbonated beverages marketspace, so it's safe to assume we all can appreciate the "Federal Reserve Bank of Coca-Cola," to coin the Motley Fool brothers, Tom and David.

2. K.I.S.S.

Who couldn't explain Coca-Cola, Dasani, Fanta, Powerade, Sprite or Minute Maid to a 5th grader? The original Coca-Cola has been around for 114 years - if your child can understand the millennium, he surely can get a red and white can of century-old Coke.

3. Industry: Beverages - Soft Drinks

I drink all kinds of products throughout the day; Coke, tea, coffee, water, juice, and sport drinks when I run. Even if you don't drink as much, I know you have to drink something - your body's more than 80% water - you've got to satisfy the thirst. The beauty of Coca-Cola is that it offers brands for four of those six beverages I mentioned above. And I'm just one Chick in the hen house - you'd be amazed at what KO products the rest of the Chicks drink - they're a rowdy group!

With that kind of buying power, you can appreciate the growth expected in this industry. We all need to drink! And that's not changing anytime soon.

4. Leader in its Field

In my lifetime, two companies have owned the beverages market - PepsiCo and Coca-Cola. The Coca-Cola Company boasts the #1 and the #3 soft drink leaders with Coke and Diet Coke respectively. Since you're dying to know, Pepsi is #2.

You already know my preference, but the facts speak for themselves:

• Ranked #83 in the Fortune 500

• Member of S & P 500

• The world's leading manufacturer, marketer, and distributor of nonalcoholic beverage concentrates and syrups

• Has sponsored the Olympic Games since 1928

• In 1998, Coca-Cola sales and other company products exceeded 1 billion servings daily

5. Repeat Profitability

KO hasn't raised the price of a can of Coke forever. I mean really, would you pay $2 for one can of pop? No, but even if you're willing to pay $1 at an overpriced hotel vending machine, it's just $1. What can you buy for $1 today? Answer - a great soda with a caffeine/sugar buzz to boot!

6. Gross Margin = (Sales - Cost of Sales) / Sales

Have you found the Income Statement for Coca-Cola? I like to use the statements provided on www.investor.msn.com because the format is great, and you can create your own reports - neat, huh? (Can you tell I work with software for a living?) Using this link, for its quarter ending June 2000, KO reported Sales as 5,621 and Cost of Sales as 1,451. ** Apply those numbers to the formula, and you have:

5621 - 1451 / 5621 = .74186

Multiply by 100 to change to a percentage and round up. Gross Margin = 74%. That's a plus for KO, as it beats the Chicks' goal of at least a 50% gross margin.

7. Net Margin = Net Income / Sales

I'll use the same quarter (rocket scientist, aren't I?) ending numbers. KO reported Total Net Income as 926. Use the Sales figure we used in the Gross Margin equation:

926 / 5621 = .1647

Multiply by 100; you know the routine. Coca-Cola's net margin is 16%, more than double the Chicks' minimum 8% criterion. I bet KO is singing in harmony now!

8. More Cash than Long-Term Debt = Cash* / Long Term Debt
*Including Marketable Securities

Now, for the next two calculations you need to get KO's Balance Sheet. My favorite site for this is MoneyCentral.msn.com, but they fail to list the marketable securities that we include in our cash statement so I bop on over to Fool.com's Balance sheet for Coke.

2843 + 226 / 852 = 3.60

As of the quarter ending June 2000, Coca-Cola has 3.6 times as much cash as long-term debt. Coke is the real thing, as that figure more than satisfies the Chicks' requirement!

9. Flow Ratio

(Current Assets - Cash) / (Current Liabilities - Short Term Debt)

Stick with me now. Here is where your calculator gets its workout. Using the Balance Sheet, we have:

(8110 - [2843 + 226]) / (11837 - 6750) = .9909
Flow Ratio = .99!!

WOW! No fizzle here! Chick Lynn, are you reading this? There might be hope for holding onto to Coca-Cola -- ALWAYS!

10. Increasing Growth

 (Sales this quarter - Sales Last Quarter) / Sales last quarter

I used the numbers for quarters ending June and March 2000, respectively: 5621 - 4391 / 4391 = .2801

Multiply by 100 to change to a percentage... you get a 28% increase, and that's before the Holiday marketing blitz... can you even?! KO's got to be ENJOYing these numbers. (Chick Tip: You can also do this Sales Growth figure from Year to Year using the Annual income statement.)

11. Strong Management and History

Douglas Daft served as President and Chief Operating Officer of Coca-Cola from December 5, 1999 until he was elected Chairman of the Board and Chief Executive Officer on February 17, 2000. He started with The Coca-Cola Company in 1969, but left to pursue running his own business in 1975. He returned to KO in 1976, working as manager of Planning and Special Projects in Sydney. He earned many promotions, including expanded responsibilities for the Middle and Far East, Africa, the Schweppes Beverages Division and the Japan Division. Now this man has truly taught the world to sing.

Daft vows to be ahead of the change, stating that Coke will be the leader of the nonalcoholic-beverage sector. According to Daft, Coke's competition is anything else that consumers drink, including water, tea, coffee and juice drinks.

12. On Sale

(52 Wk. High + 52 Wk. Low) / 2 = 52 Week Average
(69 + 42.87) / 2 = 55.99 52-wk Average

As of Monday's (09 Oct 00) market close, KO was trading at $57.81/share. Not on sale.but also not trading much higher than its average.

There you have it, folks. KO's definitely not out for the count. Eleven out of 12 is excellent. (And that last one was awfully darn close.) Besides, how could we go wrong with investing in the company responsible for the second most common word in the world, Coke?!

** All figures used represented in millions of dollars, with the exception of the stock prices for #12.