Tuesday, February 12, 2013

Coca-Cola Reports Full-Year and 4Q 2012 Earnings

From Coca-Cola's (KO) latest earnings report:
  • Full-year reported EPS was $1.97, up 6%, and comparable EPS was $2.01, up 5%. Fourth quarter reported EPS was $0.41, up 14%, and comparable EPS was $0.45, up 15%.
Nothing spectacular, but solid nonetheless.

Coca-Cola Reports Full Year and Fourth Quarter 2012 Results

Sometimes perspective can get lost when comparing earnings over such a short time frame. It's usually worth stepping back a bit.

How has Coca-Cola's capacity to produce high quality earnings changed over the past 5 or 10 years? Near-term noise can get in the way of understanding that sort of thing. Let's see how Coca-Cola's capacity to earn has progressed:

Full-year earnings for 2012 came in at $ 9 billion.

That compares to $ 5.8 billion five years ago and $ 4.3 billion ten years ago.

So a 55% increase over five years and a 107% over ten years.

Again, not exactly spectacular, but in the context of the company's size, not too bad. Also, in the context of its earnings persistence, not too bad on a risk-adjusted basis.

Coca-Cola's earnings didn't drop off much ($ 5.98 billion in 2007, $ 5.81 billion in 2008, followed by an all-time high at the time of $ 6.82 billion in 2009) during the worst of the crisis. So, when many companies were struggling to make even a fraction of what they were able to earn during better economic times, Coca-Cola continued to do just fine.

A sign of resilience that many businesses just can't match. The risk of permanent capital loss if things don't go quite as expected needs to get at least as much consideration as possible upside. It's easy to make the mistake of focusing too much on the latter.

"Nothing sedates rationality like large doses of effortless money." - Warren Buffett in the 2000 Berkshire Hathaway Shareholder Letter

As markets begin to rally, and the "effortless money" starts to get made, sometimes investors let their guard down. Coca-Cola's core economics and durable advantages have allowed it to generate more than solid increases to intrinsic value over the long haul. Yet, it's been the company's resilience during tougher times that protects an investor against possible permanent capital loss (not temporary paper losses).

It's not just what some might consider a business with "defensive" characteristics.

It's simply a higher quality business.

Of course, what really matters to shareholders is Coca-Cola's per share earnings.

On that basis the picture looks just slightly better since the share count is down somewhat over the past decade.

A 59% increase to per share earnings over five years and 124% over ten years.

Not really a huge difference.

Unfortunately, much like now, the stock has been rarely cheap (and often even quite expensive) this past decade and a half. As a result, the buybacks haven't had as favorable an impact they otherwise would have had on per share earnings and intrinsic value.

As good example as any why it would be better for long-term shareholders if the company's stock remained consistently cheap while the business continued to perform at least roughly just as well.

Ideally, the stock would sell at prices that represent a nice discount to intrinsic value for a good chunk of whatever the investing horizon happens to be.
(Of course, using a portion of free cash flow to buyback a cheap stock will usually require a longer time horizon to have a meaningful per share effect.)

If the shares had been a lot cheaper over the past 10 to 15 years, each buyback dollar would have gone further. Naturally, that's also true going forward. If Coca-Cola's stock were to drop substantially from recent prices, the buybacks would be far more effective and far more enriching to continuing long-term owners.

Coca-Cola remains a fine business. That doesn't mean the company can quite match the long run increases to per share intrinsic value it has achieved in the past. For many reasons it likely will not.

The company will be even less likely to do so if the stock price remains elevated.

Adam

Long position in Coca-Cola established at much lower than recent market prices
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