Team1

This report is published for educational purposes only by

student competing in the Research Competitions in Finance.
Date: 04/30/2014

Ticker: KO(NASDAQ)

Sector: Consumer Goods

Price: $40.49 (close 05/06/2014)

Industry: Beverages-Soft Drinks

Dividend Yield: 3.00%

Analyst

PT

LTG

(USD)

(%)

Mean

43.79

6.77

Median

43.50

8.00

High

50.00

9.00

Low

38.78

3.00

St.Dev

2.63

Recommendations

We issue a BUY recommendation on KO with a target price of 46.47, which is 13.6%

above the current market price. Although modest sales in developed countries will
contribute to lackluster growth, we believe KOs fundamental strengths will alleviate a
loss on value.

2.20
2

Buy

10

Hold

11

Sell

Total

24

Expanding advertisement expenditure. The companys advertising expenditure will

grow from $3.3 billion to $3.7 billion in 2018. We expect this extra expenditure will
increase KOs market share from 57.7% to 60.6% in the developing markets in 2018.
Furthermore, once the population in these countries reach 6.3 billion in 2018, we expect
the soft drink industry market size to increase by 2.19%. The growth of market share and
market size will drive KOs sales from $13.73 billion to $14.06 billion in developing
markets in 2018.
179.4

Enterprise Value (B)

196.4

52 Week Range

$36.83-43.43

Avg Daily Volume

18,160,592M

Dividend Yield
Shares Outstanding

0.80
3.0%
4405.89M

Institutional Holding

62.3%

Top 10 Inst Hldrs

29.1%

Cash
Cash/Share
Debt to Total Captial
Return on Equity

Trimming the Fat. KO has streamlined its management and operational structure to
improve cost competitiveness. Currently, KO has a profit margin of 18.32%, which is
6.19% above industry average, and we expect KOs restructuring cost efficiencies to
increase the current gross margin of 64.5% in 2013 to 65.8% by 2018 resulting in an
EPS of $.50 over KOs competitors.
Product Innovation. KO introduced an array of new products in recent years as health
consciousness continues to drive the conversation around soft drinks. A 4.1% CAGR in
non-carbonated beverages, the perceived healthier alternative to soda, offsets slowing
soda sales.

Coca Cola Market Brief

Market Value (B)

Beta

Price Target: $46.47

Keeping the Fizz in Soft Drinks

# Analysts

Overweight

Recommendation: BUY

20,268M
1.77
52.58
20.63

Emerging opportunities. KO will benefit from the changing population structure in

developing countries. People under 39 years old will increase from 79% to 81% of the
entire population in 2018. We expect KOs market size will enlarge by 2%. The average
gross national income (GNI) per capita in developing and emerging markets will rise
from $5,414 in 2012 to $10,733 in 2018. We believe these middle class people will drive
KOs per capita consumption from 212.3 to 293.5 in 2018. Due to the increased income
levels and growing proportion of young residents, we project that KO sales will increase
by around $3 billion by 2015.
Risks.
- KO faces currency risks as a significant portion of revenues are from outside of the
United States. A strong US dollar will negatively impact margins.
- Rising cost of raw materials poses a threat to KOs profitability.
- Changing consumer preferences towards healthier drinks and saturated markets have
resulted in slowing growth rates of carbonated soft drink sales.

Team 1
Investment Thesis
The Giant Goes Lean
KO has streamlined its management and operational structure to
improve cost competitiveness. KO is diligently seeking, identifying
and securing efficiencies across all parts of the business to drive
margins. Currently, KO has profit margin of 18.32%, which is
6.19% above the industry average. We expect KOs gross margins
to continue to increase due to the ongoing productivity and
reinvestment program. We expect KOs restructuring cost
efficiencies to increase the current gross margin of 64.5% in 2013
to 65.8% by 2018. This results in $0.50 EPS over KOs competitors.
In 2012, KO launched a four year productivity and reinvestment
program. Since its launch, they have identified incremental
synergies, primarily in the area of the North American product
supply operations. These efforts are expected to create annualized
savings of $200 million to $250 million and total savings of
$550 million to $650 million by 2018. The program has increased
gross margin by 0.4%, which is 7.18% higher than industry average.
In February of 2014, KO announced an expansion of this program,
which we believe this will further maximize the strength and
efficiency of KOs production, marketing and distribution
capabilities around the world and drive an incremental $1 billion in
productivity by 2016. We expect KOs restructuring cost
efficiencies to increase the current gross margin to 65.8% by 2018.

70%
60%
50%
40%
30%
20%
10%
0%
Operating
Margin

SG&A

Industry average

Gross
Margin

KO

Figure 1 - Sales Growth Rate

In addition, KO has strong bargaining power with suppliers resulting

in cost savings. KO has a very diversified group of suppliers with
the top 10 representing only 13.89% of its total suppliers. Due to
this, we expect cost of goods to stay stable in the near term. SG&A
expense is 36.6% of the total sales, which is 2.45% lower than
industry average. Although the company is spending more on
marketing, these expenses will be effectively offset by the decrease
in bottling and distribution expense, which will be saved through
global supply chain optimization, information technology system
standardization, and resource and cost reallocation. Moreover, KO
will be increasing the effectiveness of marketing investments by
transforming the marketing and commercial model to redeploy
resources into more consumer facing marketing investments to
accelerate growth.
60

y = 5.0056x + 40.495
R = 0.911

59

The impact of cost savings in COGS and SG&A results in operating

margin of 21.83%, which is 3.56% higher than industry average. We
are projecting that KO has an operating margin of 23.24% in 2018.
Overall, we see KOs EPS would have improved materially from
$1.90 in 2013 to $2.41 in 2018.

58
57
56
55
54
53
52
2.3

2.8

3.3

3.8

The advertising expenditure

The Company is planning to increase its advertising spending by
$1billion in 2016. We forecast KOs advertising expenditure will
reach $3.7 billion in 2018.

Figure 2 Advertising expenditure and

market share

Team 1
In developing markets including Latin America, Pacific and Eurasia
& Africa, KO will gain larger market share because of this extra
expenditure. The expanding advertising expenditure will retain
KOs current customers and attract younger consumers. According
to our research, each $1 billion increment in advertising expenditure
will lead to 0.9% increment in the market share. So we expect KOs
market share in developing market to reach 58.97% in 2018.

2018
2017
2016
2015
2014
2013
5.9

6.1

6.2

6.3

6.4

Figure 3 Increasing population from 2013

to 2018
250
y = 143.38x - 662.38
R = 0.9989

240

Currently, the population in developing countries is 6.04 billion and

the population growth rate is 0.9% per year. In 2018, we expect the
population to reach 6.31 billion. According to our analysis we found
that an increase of 10 billion in population will cause the soft drink
industry to grow to $771.4 billion. Therefore with a population of
6.31 billion, the market size will grow from $205 billion in 2013 to
$242.55 billion in 2018. As a result, we forecast KOs sales will
grow significantly because of the larger market size and market share
in 2018. A 1% increment in KOs market size will lead to $11.95
billion increment in KOs sales. In conclusion, we believe the sales
in developing market will grow from $13.57 billion in 2013 to
$14.06 billion in 2018.

230
220
210
200
190
180
170
5.8

6.2

6.4

Figure 4 Linear relationship between

population and market size
14100
y = 14.747x + 11949
R = 0.7409

14000
13900
13800
13700
13600
13500
13400
13300
100

110

120

130

140

150

Figure 5 KOs market size and sales in

developing market

Going with the Flow

Sales of Coke, Diet drinks and Zero calorie drinks have fallen by
4% since 2009 and we believe this trend will continue in the next
five years. This was offset by the 4% sales growth in still beverages
and Sprite and Fanta. Consumers now prefer healthier drinks over
soda. The key drivers of sales in developed market are
understanding the changing consumer trends and creating or
acquiring products that suit these trends. The product portfolio is
being adjusted accordingly to match with the demand.
In the product pipeline is Coke Life with natural sweetener and 50%
less sugar. Its launch in Argentina grew unit case volumes of brand
Coca Cola by 5% and incremental volume of 76%. The success of
Coke Life in Argentina and Chile makes us believe that it will drive
brand Coca Cola sales by 4% when introduced in North America.
The Company expects this product to generate incremental volume.
The sweetener is a product from the plant stevia and the bottles are
made from recycled plant material, featuring a green label. We think
this green product will appeal to the health conscious consumers
who are concerned about artificial sweeteners in brand Coke, Diet
and Zero Calorie drinks. In our market research survey, we found
that 28% of the respondents said that type of sugar was an important
consideration for them when purchasing soft drinks.
The Company has raised its stake to 16% in Green Mountain Coffee
Roasters to create Keurig Cold, an at home beverage system. The
Company expects that the at-home soda maker will appeal to people
who spend more time working from home, a changing trend in in
the job scenario. 14% of the survey respondents are likely to buy
Keurig Cold, of these 53% already own a SodaStream. Keurig Cold
makes fizzy beverages and non-carbonated drinks such as teas,
enhanced water, sports drinks and juice. We believe this will drive
unit sales for GMCR and volumes for Coke. Due to lack of data on
Keurig Cold, we gather our estimates from SodaStream (SODA).

Team 1
SODA has recorded sale of 34.3 million flavor units or concentrates
in fiscal 2013 with total revenues of $562 million. SODA estimates
retail market size for at-home carbonation to be over $260 billion.
We believe KO will be able to capitalize on 0.5% of this market
adding $1.3 billion to its revenue by 2018. For KO, sale of beverage
concentrates and syrups produces higher gross profit margins
compared to finished products. Once consumers buy a machine,
they will continue to buy refill cups thus growing volumes.
Therefore, we believe that this partnership will increase volumes
and operating revenues in North America business segment.
Coca Cola Freestyle dispensers, which are specialized soda
dispensers offering over a 100 beverage choices, saw a double digit
increase in servings and a 4-5% increase in customer visits. Three
new counter-top versions of the Freestyle dispensers launched in
May 2014 are suited to be used in medium volume locations and
office break rooms. We believe these new products will further
increase servings and volumes.

Refreshing developing and emerging markets

310
290

An important driver for Cokes continual growth is their

presence in emerging and developing markets.

y = 0.0173x + 108.15

270

KO will benefit from the changing population structure in

developing countries. Currently, people under 39 years old
represent 79% percent of the entire population. With the
increasing birth rate in emerging markets, we believe this
proportion will escalate to 81% in 2018. As KOs target
customers are from 6 to 39 years old, we expect KOs market
size will enlarge by 2%.

250
230
210
190
170
150
4400

6400

8400

10400

Figure 6 GNI per capita and per capita

consumption

Year
2014
2015
2016
2017
2018

Per capita
consumption
225.47
239.69
255.63
273.49
293.51

12400

In 2018, 17% of the populations in emerging markets will enter

into the middle class with the gross national income (GNI) of
$1,036 - $12,615 per capita. The average GNI per capita level
will rise from $5,414 in 2012 to $10,733 in 2018. As these
people enter into the middle class, they will look for modern
conveniences and small indulgences to spend their newfound
wealth on. We predict the growing middle class will drive KOs
per capita consumption from 212.3 servings
(volumes based on US. 8 fluid ounce of a finished beverage) in
2013 to 293.5 servings in 2018 in developing markets.
Due to the projected increased income levels and growing
proportion of young people, we project that KO sales will
increase by around $3 billion by 2015, just from growth in
emerging markets alone.
We believe Coke is doing exactly what it needs to in the BRIC
Nations (Brazil, Russia, India, and China) in order to capitalize
on the growth in these sectors. These nations represent the
biggest emerging markets and KO has been utilizing their
resources and strengths to ensure they get their share beverage
growth. In 2012 KO announced a plan to invest $121 million in
India, $5.9 billion in Brazil and $4 billion in China by 2017. We

Team 1
believe these investments will lead to enhanced distribution
networks.

Business Overview
Coca-Cola is the worlds largest soft drink manufacturer with
over 500 beverages distributed in over 200 countries and a
market capitalization of $179.63 Billion. The Coca-Cola
Company is headquartered in Atlanta, Georgia and was
established in 1892. As of December 31, 2013, KO employs
approximately 130,000 people.

80%
60%
40%
20%
0%
2013

2012

2011

Concentrate operations
Finished product operations

Figure 7- Net Operating Revenue by

Operation Type

80%
70%
60%
50%
40%
30%
20%
10%
0%
2013

2012

2011

Concentrate operations
Finished product operations

Figure 8 - Worlwide Unit Case Volume by

Operation Type

Coca-Cola primarily manufactures carbonated soft drinks (CSD)

and owns the rights to produce and market the four of the
bestselling CSDs: Coke, Diet Coke, Fanta and Sprite. Coca-Cola
also manufactures and markets numerous other types of nonalcoholic beverages including juices, teas, waters, enhanced
waters, energy drinks and sports drinks.
Coca-Colas business model involves manufacturing
concentrated syrups of their brands and selling those syrups, or
concentrates, to authorized bottlers. These authorized bottlers
combine the concentrates with carbonated water, sweeteners and
other ingredients then bottle or can the finished beverage to
produce a finished product. These finished products are
packaged and sold to retailers and distributors. KOs supply
chain is the worlds largest beverage distribution system.
Coke also produces finished products under their bottling
investments division. In 2010, The Coca-Cola Company
purchased one of their largest authorized bottlers in the North
American region, formally known as Coca-Cola Enterprises, and
incorporated the acquisition into their Bottling Investments
division. Generally, finished product operations produce higher
net revenues but lower profit margins when compared to
concentrate operations. KO receives about two-thirds of its
operating revenue from its finished products division; however,
roughly 70% of worldwide volume is produced through
concentrate operations.
The Coca-Cola Company is divided into seven operating
segments as follows: Eurasia and Africa, Europe, Latin America,
North America, Pacific, Bottling Investments and Corporate.

Team 1
Industry Overview and
Competitive Position
KO is the biggest soft drink manufacturer, holding 48.2% market
share in the world beverage industry and 42.4% market share in
North American soft-beverage industry. KO stay ahead because
KO has very diversified products, well-built distribution system,
famous recipe and ability to develop new products. KO is now
providing sparkling beverages, waters, enhanced waters, juices and
juice drinks, ready-to-drink teas and coffees, and energy and sports
drinks. Among those over 500 products, Coca-Cola, Diet Coke,
Fanta and Sprite are the four of top five nonalcoholic sparkling
beverage brands.

Figure 9 - 2013 Comparable CSD Sales

Sugar-less and Healthy is the new trend

Consumers in America and Europe concern more about growing
obesity and diabetes, and tend to drink less sugar and more
healthy. In 2013, liquid refreshment beverages (LRB) volume was
down -1.6% compared to growth of +1% in 2012 and +0.8% in
2011. Moreover, consumers switch to healthier alternatives such as
juices, Ready-to-Drink (RTD) teas, RTD coffee, water mixers etc.
Total volume of carbonated soft drinks (CSDs) sold declined in
2013 as a result of this new trend. In 2013, sales of CDSs (CocaCola, Fanta, Sprite, Diet Coke, Coke Zero, Sprite Zero) declined
in United States. However, at the same time, sales of Dasani, the
bottled water brand, increased by 6.8%.
We believe Coca has noticed that trend. KO not only keeps
developing new healthy products but also transformed its strategy.
It has broadened its focus from slightly decreasing carbonated soft
drink segment to considerably increasing no-alcoholic and nocarbonated beverage segment. To hasten this transition, KO has
made many recent acquisitions in this segment such as Planet Java
(maker of coffee drinks), Mad River Traders (distributor of new
age teas and juices) and a recent tender offer for Odwalla (maker
of Fresh Samantha drinks).

118000
116000
114000
112000
110000
108000
106000
104000
102000
100000
2008 2009 2010 2011 2012 2013

Figure 10- Developed Country CSD Market

Volume

Beverage markets in America and Europe are considered to be

mature. In fact, markets there have been declining for years.
Besides, the population in developed countries is limited and not
growing fast. Major beverage companies are turning to emerging
market such as China, India, and Brazil. Beverage companies hope
those developing countries will provide companies for good
opportunities of high sales growth and profits.
For example, in December 2011, Coca-Cola acquired a roughly
50% stake in Aujan Industries Co., one of the largest independent
beverage companies in the Middle East, for $980 million. Aujan,
which had revenues of $850 million in 2010, has a portfolio

containing fruit juice brands Rani, Vimto (a fruity drink

popular during Ramadan), and malted beverage Barbican.

Team 1
And revenue form overseas is about 58.7% of Cocas total revenue
and Pepsi only has about 50% overseas sale. Since the total market
volume of emerging market is expected to be 5%, we believe it
gives coca a good opportunity to take advantage of growing
emerging market. Further more, Pepsi has to pay attention to its
food production and this will weaken Pepsis competitive power.

90000
85000
80000
75000
70000
65000
60000
55000
50000
2008 2009 2010 2011 2012 2013

Figure 11 - Other Country CSD Volume

Tough Barrier
Three huge companies KO, PepsiCo (PEP) and Dr. Pepper
Snapple Group Inc. (DPS) dominate the market in America. KO
holds 42.4% market share, PEP holds 27.7% market share and
DPS holds 16.9% market share. These beverage companies
benefit from economies of scale. Moreover, new companies
seeking to enter beverage industry have to face huge capital
expenditure and advertising cost to produce and sell their
products. For these reasons there is a high barrier of entry for
new companies looking to join this industry.
Lord of the market
EBITDA margin of Coca-Cola Co. is 26.1%, higher than that of
PepsiCo, which is 22.3%, and that of Dr. Pepper Snapple, which
is 18.6%. Higher EBITDA indicates that Coca-Cola Co. sells its
products at a premium. KO has the most complicated distribution
system in the world, capable of delivering KO products all over
the world. DPS, the third biggest beverage company in America,
has entered into a contract with KO to use KO to distribute some
of their products.

22%
22%
22%
22%
22%
22%
22%
21%

Away from a price war

Even though PEP and DPS are strong competitors in the market,
KO is able to avoid being pulled into a price war. Companies in
the beverage industry try to compete with each other by
developing new products, new technology to reduce the package
cost, improving operating efficiency and diversifying their
products.
2013 2014 2015 2016 2017 2018

Figure 12 Operating margin

5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%

The strong relation between Coke, its distributers/bottlers and

supermarkets makes it difficult for new companies to enter the
market or attain a significant market share. Coke has a strong
presence in the store shelf space and literally pushes off other
products from shelf by creating incentives for store managers
who display only Coke products. This works out well for Coke
as well for the retail stores. Other products have a very low shelf
life in the stores that Coke partners with.

Financial Analysis
Coca-Cola
Pepsi
Dr.Pepper Snapple

Figure 13- Dividend Yield

Profitability
Expanding advertising expenditure in developing market drives
KOs revenue growth. As the company announced, it will raise its
advertising expenditure in next five years. We believe 10% of the ad
cost in 2018 will be used in developing markets. We project that
KOs sales in developing markets will increase from $13.57 billion
in 2013 to $14.06 billion in 2018.

Team 1
KO will maintain its dominant profitability in the soft drink
industry. The company keeps diversifying its product portfolio and
investing in new products and technologies. We believe these
strategies will help offset the loss of KOs traditional best-selling
products. We forecast the companys gross margin will increase
from 64.5% in 2013 to 65.8% by 2018. And the operating margin
will be 22% by 2018 vs. the industry average 11.5%.

2013

2018

Current
ratio

1.1x

2.1x

Quick ratio

0.5x

1.6x

Figure 14 - Ratios for evaluating KOs

liquidity.

The Dividend Giant

For over 50 years, KO has paid out an increasing dividend to its
investors. In the last ten years, investors have enjoyed an average
dividend increase of 9.7% and dividend yield around 3% in the
last 2 years. We believe there is no reason KO wont continue
this trend and will increase their dividend expectations, so
investors can rely on steady cash flows from dividends.
In comparison, Pepsi has also paid out a dividend for over 40
years. Within the last ten years, Pepsis dividend yield has also
bounced around 3% with a slight spike in 2009 above 4%. In
recent years, however, their yield has been dropping and year
over year dividend growth has been has been declining. 2014 has
seen only a growth of 1.38% from the previous year. Dr. Pepper
Snapple just recently started issuing dividends in 2009. Their
yield also hovers around 3%.
KO dividend payout remains the strongest in our opinion.
Pepsis dividend growth has been declining and Dr. Pepper
Snapple doesnt have a very long record of payouts.

25.00

20.00

15.00

10.00
2013

2015

2017

Figure 15 - Decreasing interest coverage

ratio from 2013 to 2018

1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2013 2014 2015 2016 2017 2018

Figure 16 Debt to equity ratio

Strong Liquidity in the future

By financing operating activities with long-term debt and lines
of credit, the Companys liquidity will increase in the next five
years. Currently, the Company does not have good liquidity. Its
current ratio is 1.1 and its quick ratio is 0.5. Both of these ratios
are below the ideal levels (the ideal ratio for current ratio is 2:1
and for quick ratio is 1:1). To change this situation, the company
stated they will replace certain amounts of commercial paper,
short-term debt and current maturities of long-term debt with
new issuances of long term debt in the following years. They
also had $6,410 million in lines of credit for general corporate
purposes which will expire at various times from 2014 through
2018. Therefore, we forecast the companys current ratio will
rise to 2.1 in 2018 while the quick ratio will reach 1.6 in 2018.
We expect KO to have good liquidity in 2018.
Solvency Concern in the future
The new issuance of KOs long-term debt will result in volatile
earning and decreased solvency in the next five years. KO has a
preference to finance their operating activities with debt. The
company is confident in generating enough cash flows to pay
back its liabilities. To improve KOs liquidity, the company will
issue more long-term debt in the next five years. We estimate
the companys debt to equity ratio will increase to 1.57 vs. the
industry average of 1.1. Moreover, though KOs interest
coverage ratio is far beyond the minimum requirement1.5, we

Team 1
Average
processing
period

2013

2018

Receivables

38.0

37.5

Inventory

65

65.0

Payables

210.3

180.0

3.1x

2.8x

0.5x

0.5x

Net fixed
asset
turnover
Asset
turnover

Figure 17- Ratios for evaluating

KOs long and short term activities

believe the ratio will reduce significantly in the next 5 years from
22.1 to 15.6. So even though, the companys liquidity will
increase in the next five years, its ability to meet its long-term
commitments will be slightly deteriorated.
Take adventure for promising new trend
KOs investment strategy will help lead the trend in the
beverage industry and create a diversified product portfolio
which will lead to new opportunities in the market. However, the
companys ability to generate revenue from fixed assets in next
five years will be deteriorated by this strategy. To offset losses
on its best-selling products, the Company invests in promising
new brands and technologies such as Green mountain coffee,
Tonicorp and Soda stream. We believe these investments will
allow KO to gain profit in coffee and milk market. For the soda
machine, we think it will take more than three years for people
to accept this new home appliance. So it will drag back KOs net
fixed asset turnover rate a little bit from 3.1 in 2013 to 2.8 in
2018.

ROE
ROA

Leverage
Ratio
Debit to
Equity

Figure 18 - Dupont Analysis

DuPont Analysis
We project KOs return on equity rate will increase and catch up
with its comparable companies in 2018. We firstly use three steps
DuPont Analysis to demonstrate KOs profitability and then we
decompose the asset leverage rate into debt to equity rate and 1
to show the effects of KOs newly issued long term debt.
According to the companys plan, the debt volume will increase
in the next few years. So we forecast that from 2013 to 2018, the
debt to equity ratio will increase from 1.08 to 1.57. The increased
financial leverage will push the ROE up to 29.4%. Though, this
rate is an average level of KOs past performance, the company
has prospect to catch up with its comparable companies in the
next five years.

Valuation

Sales (in thousands)

$60,000
$50,000

R = 0.9035

$40,000
$30,000
$20,000
$10,000

FY 2004
FY 2005
FY 2006
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012

$0

Figure 19 - Sales

Forecasting Revenue
We used a two-step approach forecast revenues for KO. First, we
estimated sales by each of the seven business segments in KO
and forecasted growth for each segment based on historical
growth, consumer trends by region and KOs activity in each
segment. Next, we broke down sales by product segments as
follows: Coca-Cola, Powerade and other (non-CSD), Diet Coke,
Sprite and Fanta, Coke Zero, Sprite Zero and Barqs, Minute
Maid and Dasani water. We made assumptions for the percent
growth of each product based on historical growth and consumer
trends and preferences. We averaged the two total sales growth
numbers from each approach year-to-year and incorporated that
into our model to predict future cash flows.
Using this two-step approach was done so we could more
accurately predict future cash flows for valuation. We were able
to see the overall effect on total sales by changing small
assumptions in sales by region or by product.
Discounted Cash Flow valuation

Team 1
6.32%

6.82%

7.32%

3.50%

43.99

37.38

32.5

4.00%

52.48

43.20

36.71

4.50%

65.64

51.54

42.44

Value of Stock

Figure 20- WACC Sensitivity Analysis

90
80
70
60
50
40
30
20
10
0

We used the Perpetuity Growth Method for valuating KO

because KO is a mature company with stable growth. We
discounted the Free Cash Flows to the Firm (FCFF) for the
projected 5 years. Beyond the final projected year, we used a
terminal growth rate of 4% based on expected growth of the
economy and KO being a mature company. The DCF analysis
yielded an Equity value of $174 billion and a stock price of
$46.47. There is, however, a high degree of sensitivity to the
market number based on WACC and terminal growth rates.
WACC
A weighed average cost of capital of 6.82% was used to discount
the expected cash flows to the firm. We calculated WACC using
the capital asset pricing model and the following parameters. The
cost of debt was calculated using the current rate on a 20 year
AA rated corporate bond, which is KOs bond rating. A marginal
tax rate of 35% was applied to give an after-tax cost of debt rate
of 2.84%. To calculate the cost of equity, a risk free rate of 3.45%
was used based on a 30 year Treasury bond rate. A beta of .8 was
used along with a market premium of 5.15%. This resulted in a
cost of equity of 7.57%. Using total debt of $36,055 and market
value of equity at $184,914 gave percentages of total debt and
equity at 16% and 84% respectively. Using these numbers gave
a WACC of 6.82%.

Expected Growth Rate

Figure 21 - Value vs. Expected Growth

Growth rate

Value

6.00%

$82.37

5.00%

$49.84

4.00%

$35.54

3.00%

$27.50

Figure 22 Dividend growth model

Dividend Discount Model

Because KO is a dividend aristocrat, a dividend discount model
is also an appropriate model to determine value. Using the
Gordon Growth Model, we calculated a value of $35.54 using an
expected growth rate of 4% and a payout ratio of 64.71%.
Although this value is low compared to current market price, a
growth at 4% is a worst case. Conservative estimates put
earnings growth at 4%. Any growth above 4% will put value of
the stock right at current market price.

Risk
Currency risk
KO operates in over 200 countries. We expect that more than 60%
of its revenue will flow from strong international sales in the next
five years, thereby exposing it to currency fluctuations, which are
particularly adverse with a stronger USD. Currently, KO uses 80
functional currencies in addition to the U.S. dollar and derived $27.0
billion of net operating revenues from operations outside the United
States. KOs consolidated financial statements are presented in
USD. Foreign currency fluctuations decreased SG&A by 1%,
consolidated net operating revenues by 2%, and consolidated
operating income by 4 percent in 2013.
On the other hand, because of the geographic diversity of KOs
operations, weaknesses in some currencies might be offset by
strengths in others overtime. Moreover, KO is using forward

10

Team 1
1.95
1.9
1.85
1.8
1.75
1.7
0

0.02

0.04

0.06

Figure 23: Price Sensitivity to

Changes in price of sweetener

Raw Material Costs

30.00
25.00
20.00
15.00
10.00
5.00
0.00

Figure 24: Price Changes in

price of sweetener

10
9
Total CSD
volume
(billion)

8
7
6

KO's CSD
volume
(billion)

5
4
3

Other CSD
volume
(billion)

2
1
0
2009 2010 2011 2012 2013

Figure 25: KO and Industrys CSD

Market Share Trend

exchange contracts and purchasing currency options and collars on

portions of forecasted cash flows denominated in foreign currencies.
Because of this, KOs currency risk is relatively small. The total
notional values of contracts that have been designated and qualify
for the Company's foreign currency cash flow hedging program was
$8,450 million as of December 31, 2013. The total notional values
of interest rate swap agreements that were designated and qualified
for the Company's interest rate cash flow hedging program were
$1,828 million as of December 31, 2013. However hedging is not
perfect, forward exchange contracts and currency options are
subject to forward exchange rate basis risk. KO cannot assure that
fluctuations in foreign currency exchange rate would not materially
lower earnings.

KOs profitability could be negatively affected by increasing in

commodity prices, particularly for raw materials such as sugar,
cocoa, and organs. KO itself is responsible for purchasing the raw
materials used to make its concentrates and syrups. Other variations
in the prices for these goods can affect the companys total cost of
production as well as its profit margins. For example, weather and
government regulations can cause supply shortages of commodities
and increase the cost of corn syrup. Additionally, ownership of the
companys North American distribution platform will further
increase KOs exposure to other commodities such as aluminum and
plastic resins. The prices for these packaging materials fluctuate
depending on market conditions. Thus, increasing raw material costs
can have an impact on the bottom line. This would increase KOs
operation cost and reduce its profitability. KO enters commodity
futures contracts and other derivative instruments on various
commodities to mitigate the price risk associated with forecasted
purchases of materials used in manufacturing process. The total
notional values of derivatives that have been designated and qualify
for commodity cash flow hedging program was $26 million as
of December 31, 2013. KOs profitability could be negatively
affected by increase in commodity prices, particularly for raw
materials such as sugar, cocoa, and orange. KO makes purchases of
raw material that are used to manufacture concentrates and syrups.
Variations in the prices for these goods can affect the companys
total cost of production as well as its profit margins.
Macroeconomic factors like weather and government regulations
can cause commodity supply shortages and increase the cost of corn
syrup. The price of HFCS and the price of sugar increased 117.4%
and 117.7% in the past ten years. (See figure 1) We estimate a
change in price of sweetener of 1% would affect the EPS by
approximately 0.83%. (See figure 2) In addition, ownership of the
companys North American distribution platform Coca Cola
Enterprises will further increase KOs exposure to prices of other
commodities such as aluminum and plastic resin. The prices for
these packaging materials fluctuate depending on market conditions.
Thus, increasing raw material costs can have an impact on the
bottom line. This would increase KOs operation cost and reduce its
profitability. KO enters into commodity futures contracts and other
derivative instruments on commodities to mitigate the price risk

11

Team 1
associated with forecasted purchases of materials used in
manufacturing process. The total notional values of derivatives that
have been designated and qualify for commodity cash flow hedging
program was $26 million as of December 31, 2013.

Health Conscious
Growing consumer preference for healthier drinks and increasingly
saturated markets has resulted in negative growth rates for
carbonated soft drinks (CSD) sales. (See figure 3) Consumer
demand for CSD has been negatively affected by concerns
about health and wellness that is true across most of KO's markets.
In fact, KO has approximately 75% of products are classified as
CSD which are particularly sensitive to changes in demand for CSD.
Although KO has been responding to this shift in consumption away
from CSD to healthier alternatives, such as tea, juices, and water, it
still faces a challenge in balancing the risk of new innovations with
the low growth rates of established brands. Moreover, possible new
or increased taxes on sugar-sweetened beverages by government
entities to reduce consumption could increase the cost of sugarsweetened beverages, which could adversely affect KO overall
profitability.

12

Team 1
Appendix
Appendix 1 - CSD Market Share by Company
Appendix 2 - 2013 KO Revenue by Product
Appendix 3 - 2013 KO Case Volume
Appendix 4 - Predicted Sales by Segment
Appendix 5 - Predicted Sales by Product
Appendix 6 - Income Statement
Appendix 7 - Balance Sheet
Appendix 8 - Projected Cash Flow
Appendix 9 - WACC Calculation
Appendix 10 - Projected Free Cash Flow
Appendix 11 - Perpetuity Growth Method

Appendix 12 - Revenue by Product

Appendix 13 Revenue Forecast
Appendix 14 - Porter's Five Forces Diagram
Appendix 15 - Porter's Five Forces by Product
Appendix 16 - EV/EBITDA
Appendix 17 - Estimated 2014 Sales by Operating Segment
Appendix 18 - Supply Chain Diagram
Appendix 19 US & International Revenues
Appendix 20 Revenues by Business Segment
Appendix 21 Mergers & Acquisitions
Appendix 22 Top 10 Investors
Appendix 23: Advertising expenditure model
Appendix 24 Developing market model
Appendix 25 Survey Results

13

Team 1
Consumer Soft Drinks Market Share
24%
49%

1%
5%

21%

The Coca-Cola Company

Pepsico, Inc.

Dr Pepper Snapple Group, Inc.

Cott Corporation

Other
Appendix 1 - CSD Market Share by Company

Revenue by Product 2013

8% 2%
29%

9%

14%

16%

22%

Coca-Cola

Powerade and other (non-CSD)

Diet Coke

Sprite, Fanata

Coke Zero, Sprit Zero, Barqs

Minute Maid

Dasani
Appendix 2 - 2013 KO Revenue by Product

14

Team 1

2013 Unit Case Volume

U.S.

Outside U.S.

19%

81%

Appendix 3 - 2013 KO Case Volume

15

Team 1

2013

2014

2015

2016

2017

2018

$2,763.0
5,334.0
4,939.0
21,590.0
5,869.0
7,676.0
154.0
(1,471.0)
$46,854.0

$2,845.9
5,360.7
5,062.5
21,374.1
6,045.1
7,522.5
169.4
(1,544.6)
$46,835.5

$2,931.3
5,427.7
5,189.0
21,053.5
6,286.9
7,447.3
186.3
(1,621.8)
$46,900.2

$3,019.2
5,536.2
5,370.7
20,632.4
6,601.2
7,447.3
205.0
(1,702.9)
$47,109.1

$3,109.8
5,688.5
5,612.3
20,116.6
6,997.3
7,521.7
225.5
(1,788.0)
$47,483.7

$3,203.1
5,887.6
5,921.0
19,513.1
7,487.1
7,672.2
248.0
(1,877.4)
$48,054.6

Sales growth Assumptions

Eurasia & Africa
Europe
Latin America
North America
Pacific
Bottling Investments
Corporate
Eliminations

2.45%
0.50%
2.24%
-0.42%
3.00%
-13.70%
10.00%
5.00%

3.00%
1.25%
2.50%
-1.00%
4.00%
-2.00%
10.00%
5.00%

3.00%
2.00%
2.50%
-1.50%
5.00%
-1.00%
10.00%
5.00%

3.00%
2.75%
3.50%
-2.00%
6.00%
0.00%
10.00%
5.00%

3.00%
3.50%
4.50%
-2.50%
7.00%
1.00%
10.00%
5.00%

3.00%
3.50%

2.00%
10.00%
5.00%

Total Sales Growth

-2.42%

-0.04%

0.14%

0.45%

0.80%

1.20%

Sales by Segment
Eurasia & Africa
Europe
Latin America
North America
Pacific
Bottling Investments
Corporate
Eliminations
Total Sales

5.50%
-3.00%
7.00%

Appendix 4 - Predicted Sales by Segment

16

Team 1
2013

2014

2015

2016

2017

2018

Sales (by product)

Coca-Cola
US sales
International Sales
US Growth
International Growth

$13,634.5
4,158.5
9,476.0
(0.8%)
(5.4%)

$13,782.4
4,116.9
9,665.5
(1.0%)
2.0%

$14,010.7
4,055.2
9,955.5
(1.5%)
3.00%

$14,327.8
3,974.1
10,353.7
(2.0%)
4.00%

$14,746.1
3,874.7
10,871.4
(2.5%)
5.00%

$15,282.1
3,758.5
11,523.7
(3.0%)
6.00%

Powerade and other (non-CSD)

Growth

$10,073.6
4.9%

$10,476.6
4.0%

$10,948.0
4.50%

$11,495.4
5.00%

$12,127.6
5.50%

$12,855.3
6.00%

$7,402.9
2,257.9
5,145.0
(2.8%)
(7.3%)

$7,328.9
2,235.3
5,093.6
(1.0%)
(1.0%)

$7,328.9
2,235.3
5,093.6
0.0%
0.0%

$7,402.2
2,257.7
5,144.5
1.0%
1.0%

$7,550.2
2,302.8
5,247.4
2.0%
2.0%

$7,776.7
2,371.9
5,404.8
3.0%
3.0%

6,372.1
4,696.3
1,675.9
(1.4%)
0.2%

6,563.3
4,837.2
1,726.2
3.0%
3.0%

6,825.8
5,030.6
1,795.2
4.0%
4.0%

7,167.1
5,282.2
1,885.0
5.0%
5.0%

7,597.2
5,599.1
1,998.1
6.0%
6.0%

8,129.0
5,991.0
2,137.9
7.0%
7.0%

$4,427.7
(13.0%)

$4,604.8
4.0%

$4,789.0
4.0%

$4,980.6
4.0%

$5,179.8
4.0%

$5,387.0
4.0%

Minute Maid
US Sales
International Sales
US Growth
International Growth

3,846.7
1,092.5
2,754.2
(3.6%)
3.2%

4,077.5
1,158.0
2,919.5
3.0%
3.0%

4,322.2
1,227.5
3,094.7
3.0%
3.0%

4,581.5
1,301.1
3,280.4
3.0%
3.0%

4,856.4
1,379.2
3,477.2
3.0%
3.0%

5,147.8
1,462.0
3,685.8
3.0%
3.0%

Dasani
US Sales
International Sales
US Growth
International Growth

1,077.6
1,049.6
27.9
6.8%
(9.1%)

1,149.6
1,123.1
26.5
7.0%
(5.0%)

1,226.9
1,201.7
25.2
7.0%
(5.0%)

1,309.8
1,285.8
23.9
7.0%
(5.0%)

1,398.6
1,375.8
22.7
7.0%
(5.0%)

1,493.7
1,472.2
21.6
7.0%
(5.0%)

$46,854.0
(2.4%)

47,983.2
2.4%

49,451.5
3.1%

51,264.3
3.7%

53,455.9
4.3%

56,071.7
4.9%

1.2%

1.6%

2.1%

2.5%

3.0%

Diet Coke
US Sales
International Sales
US Growth
International Growth
Sprite, Fanata
Sprite
Fanta
Sprite growth
Fanta Growth
Coke Zero, Sprit Zero, Barqs
Growth

Total Sales
growth

Average Growth rate

(Average of Total Sales Growth by Segment
and Total Sales Growth by Product)
Appendix 5 - Predicted Sales by Product

17

Team 1
2013

2014

2015

2016

2017

2018

$46,854.0
16,625

$47,409.3
16,911

$48,167.4
17,254

30,229.0

30,705.8

31,317.2

$49,157.6
16,625.0
32,083.9

$50,403.8
16,703.5
33,023.3

$51,940.0
16,850.2
34,159.6

SG&A expenses (excluding amortization)

Other operating
charges
EBITDA

17,129.0

17,541.5

17,822.0

18,188.3

18,649.4

19,217.8

895.0
12,205.0

589.5
12,574.9

589.5
12,905.8

589.5
13,306.1

589.5
13,784.4

589.5
14,352.3

Depreciation
Amortization
EBIT

1,796.0
181.0
10,228.0

1,838.3
212.8
10,523.7

1,969.6
243.5
10,692.7

2,010.1
267.0
11,029.1

2,061.0
286.6
11,436.8

2,123.8
298.4
11,930.1

Interest expense
Interest (income)
Other non-operating (income) / expense
including equity income
Pretax income

463.0
(534.0)
($1,178)

481.8
(496.0)

512.6
(294.0)

543.3
(343.7)

574.1
(398.1)

604.8
(444.0)

11,477.0

(1,178.0)
11,655.6

(1,117.7)
11,591.8

(1,117.7)
11,947.1

(1,117.7)
12,378.5

(1,117.7)
12,887.0

Income taxes
Minority interest expense
Net income

2,851.0
42.0
$8,584.0

2,810.7
57.0
$8,787.9

2,781.6
57.0
$8,753.2

2,905.2
57.0
$8,984.9

2,988.5
57.0
$9,333.0

3,112.5
57.0
$9,717.5

4,509

4,420

4,300

4,190

4,090

3,990

$1.90

$1.99
4.43%

$2.04
2.38%

$2.14
5.34%

$2.28
6.41%

$2.44
6.73%

Income Statement
Sales
Cost of goods sold (excluding depreciation)
Gross profit

Diluted weighted average shares (in

millions)
Earnings per share
Growth
Appendix 6 - Income Statement

18

Team 1
2013

2014

2015

2016

2017

2018

$10,414.0
6,707
3,147
4,873
3,277.0
2,886
0
31,304.0

$9,115.9
6,669
3,147.0
4,894
2,974.6
2,858
0.0
29,761.9

$10,483.0
6,707.0
3,318.7
4,873.0
3,000.7
2,916
0.0
31,437.6

$12,428.6
6,637.3
3,371.7
4,870.8
3,040.5
2,886.0
0.0
33,792.1

$14,109.6
6,743.4
3,441.0
4,948.7
3,095.2
2,844.6
0.0
35,992.2

$15,490.6
6,882.1
3,528.3
5,050.4
3,166.4
2,890.0
0.0
38,017.1

14,967.0
10,393
1,119
4,661.0
6,744
7,415
12,312.0
1,140
$90,055.0

15,736.2
10,687
1,119.0
5,123.5
6,744
7,415
12,312.0
1,140.0
$90,784.0

16,560.4
10,393.0
1,581.5
5,034.1
6,744.0
7,415
12,312.0
1,422.8
$93,618.8

17,401.4
10,687.0
1,492.1
4,319.8
6,744.0
7,415.0
12,312.0
1,642.6
$95,505.6

18,263.9
10,981.0
777.8
4,661.0
6,744.0
7,415.0
12,312.0
1,809.6
$99,636.5

19,152.6
10,933.8
749.0
3,989.0
6,744.0
7,415.0
12,312.0
1,930.3
$99,903.7

Accounts payable
Loans and Notes payable
Current maturities of long-term debt
Accrued Income Tax
Liabilities held for sale
Total current liabilities:

$9,577.0
16,901
1,024
$309.0
$0.0
27,811.0

$9,152.6
$16,901.0
1,024
$334.1
$0.0
27,661.7

$9,233.0
17,151.0
$1,024.0
$337.0
$0.0
29,833.5

$9,355.5
17,651.0
$1,024.0
$341.5
$0.0
30,460.4

$9,523.6
18,151.0
$2,612.5
$347.6
$0.0
30,864.7

$9,742.7
18,651.0
$2,612.5
$355.6
$0.0
31,591.8

Long-term debt
Deferred Income Taxes
Other long-term liabilities
Total liabilities:

19,154.0
6,152.0
3,498
56,615.0

20,850.0
6,152.0
3,498.0
58,161.7

22,546.0
6,152.0
3,498.0
62,029.5

24,242.0
6,152.0
3,498.0
64,352.4

27,477.0
6,552.0
3,498.0
69,161.7

28,134.0
6,652.0
4,268.0
70,375.8

Total stockholders' equity

33,440.0

32,622.3

31,589.3

31,153.1

30,474.8

29,527.9

Total liabilities and equity:

$90,055

$90,193

$93,326

$95,478

$97,193

$98,997

Balance Sheet
Cash
Other short term investments
Marketable Securities
Accounts receivable, net
Inventories
Prepaid expenses and Other current assets
Assets held for sale
Total current assets
PP&E, net
Equity method investments
Other Investments
Other Assets
Trademarks with indefinite lives
Bottlers Franchise Rights with indefinite lives
Goodwill
Other Intangible assets
Total assets:

Appendix 7 - Balance Sheet

19

Team 1
Projected Cash Flow Statement
Operating activities
Net Income
Stock-based compensation expense
Depreciation
Amortization
Deferred Income Taxes
Foreign Currency
adjustments
Significant (gains) Losses on sales of
assets
Other operating charges
Other items
(Income) from unconsolidated affiliates, net of dividends
(Increase) / decrease in working
capital
Change in other long-term assets and liabilities
Cash flow from operating activities
Investing activities
Purchases of investments
Proceeds from disposal of
investments
Acquisitions of businesses, equity method investments and
nonmarketable securities
Proceeds from disposals of businesses, equity method
investments and nonmarketable securities
Capital expenditures
Proceeds from disposals of PP&E
Other investing activities
Additions to definite life intangibles
Cash flow from investing activities
Cash flow available for financing
activities
Financing activities
Issuance of debt
Payment of debt
Issuance of Stock
(Repayment) of long-term
debt
Repurchase of
equity
Dividends
Other financing activities
Cash flow from financing activities
Net change in cash
Beginning cash balance

2014

2015

2016

2017

2018

$8,787.9
280.0
1,838.3
212.8
640.0

$8,753.2
280.0
1,969.6
243.5
646.4

$8,984.9
280.0
2,010.1
267.0
652.9

$9,333.0
280.0
2,061.0
286.6
659.4

$9,717.5
280.0
2,123.8
298.4
666.0

15.0

15.0

15.0

15.0

15.0

(494.0)
589.5
44.7
(294.0)

(503.9)
589.5
45.1
(294.0)

(514.0)
589.5
45.6
(294.0)

(524.2)
589.5
46.0
(294.1)

(534.7)
589.5
46.5
(294.1)

(196.7)
(1,301.7)
10,121.8

(433.8)
(1,301.7)
10,008.9

(426.0)
(1,301.7)
10,309.2

(416.8)
(1,301.7)
10,733.7

(405.9)
(1,301.7)
11,200.3

(11,468.0)
$8,798

(11,468.0)

(11,468.0)

(11,468.0)

(11,468.0)

($937)

8,797.7
($937)

8,797.7
($937)

8,797.7
($937)

8,797.7
($937)

$430

$430

$430

$430

$430

(2,607.5)
118.3
(238.7)
995.6
(4,909.3)

(2,793.7)
118.3
(238.7)
963.3
(1,950.7)

(2,851.1)
118.3
(238.7)
934.0
(2,037.5)

(2,923.4)
118.3
(238.7)
907.3
(2,136.5)

(3,012.5)
118.3
(238.7)
883.0
(2,249.9)

5,212.6

8,058.2

8,271.7

8,597.2

8,950.5

37,903.7
(33,260.7)
1,462.0
($2,484)

37,903.7
(33,260.7)
1,462.0

37,903.7
(33,260.7)
1,462.0

37,903.7
(33,260.7)
1,462.0

37,903.7
(33,260.7)
1,462.0

(2,484.0)

(2,484.0)

(2,484.0)

(2,484.0)

(4,792.8)
(5,392.8)
$54
(6,510.6)

(4,907.1)
(5,459.0)
54.0
(6,691.1)

(4,307.7)
(5,693.4)
54.0
(6,326.1)

(4,584.0)
(6,007.3)
54.0
(6,916.3)

(4,892.4)
(6,352.0)
54.0
(7,569.4)

(1,298.1)
10,414.0

1,367.1
9,115.9

1,945.6
10,483.0

1,681.0
12,428.6

1,381.0
14,109.6

Appendix 8 - Projected Cash Flow Statement

20

Team 1
Ending cash
balance

$9,115.9

$10,483.0

$12,428.6

$14,109.6

$15,490.6

Weighted Average Cost of Capital

Cost of Debt
20 year AA rated Corporate Bond
Marginal Tax Rate
After Tax Cost of Debt = 4.37% * (1-35%)

4.37%
35%
2.84%

Cost of Equity
Risk Free Rate (30 year Treasury Bond rate on 04/25/14)
Beta
Market Risk Premium
Cost of Equity = 4.37% + (0.8 * 5.15%)

3.45%
0.8
5.15%
7.57%

Percentage of Capital
Total Debt
Market Value of Equity
Total Capital

$36,055
$184,914
$220,969

WACC = (2.84% * 16%) + (7.57% * 84%)

16%
84%
100%
6.82%

Appendix 9 - WACC Calculation

2014
Sales

Projected Year Ending December 31,

2015
2016
2017

2018

$47,409.3

$48,167.4

$49,157.6

$50,403.8

$51,940.0

12,574.9
(1,838.3)
(212.8)
10,523.7
(2,539.7)
7,984.0

12,905.8
(1,969.6)
(243.5)
10,692.7
(2,580.5)
8,112.2

13,306.1
(2,010.1)
(267.0)
11,029.1
(2,661.7)
8,367.4

13,784.4
(2,061.0)
(286.6)
11,436.8
(2,760.1)
8,676.7

14,352.3
(2,123.8)
(298.4)
11,930.1
(2,879.1)
9,051.0

Plus: Depreciation
Plus: Amortization
Less: Capital expenditures
Less: Additions to definite life intangibles
+ / - Changes in working capital
+ / - Changes in other assets and liabilities

1,838.3
212.8
(2,607.5)
(995.6)
(196.7)
(294.0)

1,969.6
243.5
(2,793.7)
(963.3)
(433.8)
(294.0)

2,010.1
267.0
(2,851.1)
(934.0)
(426.0)
(294.0)

2,061.0
286.6
(2,923.4)
(907.3)
(416.8)
(294.1)

2,123.8
298.4
(3,012.5)
(883.0)
(405.9)
(294.1)

Unlevered Free Cash Flow

$5,941.3

$5,840.4

$6,139.3

$6,482.7

$6,877.7

EBITDA
Less: Depreciation
Less: Amortization
EBIT
Less: Taxes @
Tax-effected EBIT

24.1%

Appendix 10 - Projected Free Cash Flow

21

Team 1
Perpetuity Growth Method
Weighted average cost of capital:
Net present value of free cash flow

6.82%
$25,642.2

Growth rate of FCF after

2018
Terminal value
Present value of the Terminal Value

$253,738.5
182,450.2

Enterprise Value
LESS: Net Debt (d) (e)
Equity Value

$208,092.4
(36,055.0)
$172,037.4
Diluted shares:
Equity Value Per Share

4.0%

4,509.000
$46.15

Appendix 11 - Perpetuity Growth Method

22

Team 1
Revenue by Product
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2009

2010

2011

2012

2013

2014

2015

Coca Cola

Minute Maid

Diet Coke

Sprite & Fanta

Coke Zero, Sprike Zero, Barq and other brands

Dasani

2016

2017

2018

Powerade & Other Brands

Appendix 12 - Revenue by Product

Revenue Forecast
$53,000.0
$52,000.0
$51,000.0
$50,000.0
$49,000.0
$48,000.0
$47,000.0
$46,000.0
$45,000.0
$44,000.0
$43,000.0
2011

2012

2013

2014

2015

2016

2017

2018

Appendix 13 Revenue Forecast

23

Team 1

Carbonated
Soft Drinks
Bottled Water
Fruit
Beverages
Tea
Sports/Energy
Drinks
Average

Power of
suppliers

Power of
buyers

Threat of
substitute
s

Rivalry

Threat of
new
entrants

2.8

3.6

3.8

3.2

2.4

Porter's Five Forces

Power of suppliers
5
4
3
2

Threat of new entrants

Power of buyers

1
0

Rivalry

Threat of substitutes

Appendix 14 - Porter's Five Forces Diagram

24

Team 1
Power of suppliers

Power of
buyers

Threat of
substitutes

Moderate
* Bottlers free to
choose their own
products
* Bound by
consumer
preferences
* Individual buyers
have low power
High
* Consumers have
a large pool of
products to choose
from
* Low switching
costs

Moderate
* Health conscious
consumers prefer
water, juices and
teas
* Still beverages
serve as
substitutes

Moderate
* Two top players
* Compete for
limited consumers
* Product
differentiation by
strong branding

Low
* Economies of scale
* Slowing soda sales
* High marketing and
brand strength

Moderately High
* Numerous
substitute
products exist
* Tap water and
water filtration
devices are low
cost substitutes

Moderate
* Oligopolistic
competition
* Compete to
increase market
share
* High demand due
health, fitness and
diet trends
Moderately High
* Competition from
fresh juices
* Tropicana (PepsiCo)

Moderately Low
* Mature market
* High start-up costs
* Coke has large
market share
* High brand
strength

Rivalry

Threat of new
entrants

Carbonat
ed Soft
Drinks

Moderate
* Refined sugar aspartame/high fructose
corn syrup is available from
multiple sources

Bottled
Water

Moderate
* Higher in developing
markets due to water
scarcity

Fruit
Beverag
es

Moderate
* Sensitive to orange
supplies

High
* Consumers
switch tastes easily
* Wide product
range will satisfy
different consumer
preferences

Moderately High
* Carbonated soft
drinks, water,
fresh juices

Tea

Moderately Low
* Ingredients readily
available
* Owning bottling plants
reduces supplier power

Moderately Low
* Low power to
dictate terms and
prices
* Sensitivity to
competitive pricing

Moderately High
* Home-made tea,
fruit drinks

Moderate
* Heavy competition
* Competition from
water, coffee, bottled
liquids and other tea
brands
* Low product
differentiation

Moderately High
* New local brands
have a cost
advantage

Sports/E
nergy
Drinks

Moderate
* Ingredients available from
multiple sources

Moderate
* Brand loyalty
towards Gatorade
* Individual buyers
have a choice
* Uses same shelf
space as Coke

Moderately High
* Numerous
choices -Sports,
energy drinks,
soda, juice

Moderate
* Gatorade (PepsiCo)
* Both have strong
marketing in sports
events

Moderately Low
* Coke & Pepsi are
strong players

Moderate
* Local brands affect
overall competition

Appendix 15 - Porter's Five Forces by Product

25

Team 1
EV/EBITDA
20
18
16
14
12
10
8
6
4
2
0

Appendix 16 - EV/EBITDA

Estimated 2014 Sales by Operating Segment

Bottling
Investment
21%

Corporate
<1%

Eurasia & Africa

6%
Europe
11%
Latin America
10%

Pacific
13%

North America
39%

Appendix 17 - Estimated 2014 Sales by Operating Segment

26

Team 1

Appendix 18 - Supply Chain Diagram

27

Team 1
US & International Revenues
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2011

2012

2013

2014

North America

2015

2016

2017

2018

2017

2018

International

Appendix 19 US & International Revenues

Source: Team estimates

Revenues by Business Segment

50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%

2011

2012

2013

2014

2015

2016

Eurasia & Africa

Europe

Latin America

North America

Pacific

Bottling Investments

Corporate

Eliminations

Appendix 20 Revenues by Business Segment

Source: Team estimates

28

Team 1

Date

Target Name

02/05/14

Green Mountain Coffee

03/20/13

Pinya Holdings,Crystal Springs

02/22/13

Innocent Ltd

02/22/13

Fresh Trading Ltd

01/02/13
12/14/11

Sacramento Coca-Cola
Bottling
Aujan Inds-Beverage Bus,SA

10/27/11

Great Plains Coca-Cola

04/09/10

Innocent Ltd

03/19/10

Nidan Soki

02/25/10

Coca-Cola Entr Inc-NA Bus

04/06/09

Innocent Ltd

04/06/09

Fresh Trading Ltd

Appendix 21 Mergers & Acquisitions

Top Ten Investors

Investor Name
% O/S
Berkshire Hathaway Inc.
9.10
The Vanguard Group, Inc.
5.12
State Street Global Advisors
(US)
3.57
BlackRock Institutional Trust
Company, N.A.
3.22
Fidelity Management &
Research Company
2.56
Yacktman Asset Management
LP
1.01
Capital Research Global
Investors
0.87
Capital World Investors
0.81
Bill & Melinda Gates
Foundation
0.77
Norges Bank Investment
Management (NBIM)
0.76

Pos
400,000,000
225,105,047
156,749,694
141,693,368
112,655,966
44,453,471
38,341,200
35,500,000
34,002,000
33,506,105

Appendix 22 Top 10 Investors

29

Team 1
Appendix 23: Advertising expenditure model

Year
Ad Expenditure
Year
Ad Expenditure

2005
2.5
2012
3.27

2006
2.6
2013
3.32

2007
2.8
2014
3.34

2008
3
2015
3.39

2009
2.79
2016
3.47

2010
2.92
2017
3.57

2011
3.26
2018
3.69

Projected Ad expenditure (according to KOs statement in 10k)

Year
Market Share
Year
Market Share

2005
53
2010
55.4

2006
53.6
2011
56.1

2007
53.4
2012
57.2

2008
54.8
2013
57.7

2009
55.7

KOs historical market share in developing markets

Year
Ad Expenditure
Market Share
Liner regression result

2014
3.34
57.21

2015
2016
2017
3.39
3.47
3.57
57.46
57.86
58.36
Market share= 5.0056*Ad exp+40.495
Coeffient:0.95

2018
3.69
58.97

Projected market share from 2014 to 2018 and linear regression result

60
y = 5.0056x + 40.495
R = 0.911

59
58
57
56
55
54
53
52
2.3

2.8

3.3

3.8

30

Team 1
2012
1.1
4.3
0.6
6.0

Africa
Asia& Pacific
Latin America
Total population in underdeveloped
Growth rate
Compounding annual growth rate

2050
2.3
5.3
0.7
8.3
39.2%
0.9%

World population prediction (source from UN)

Year
Population
Market Size
Year
Population
Market Size
Linear regression

2010
5.85
177.10
2015
6.15
219.22

2011
2012
2013
5.91
5.99
6.04
186.20
194.80
205.00
2016
2017
2018
6.20
6.26
6.31
226.93
234.71
242.55
Market Size=143.38*Population-662.38
Correlation=0.99

2014
6.10
211.57

Projected market size for the beverage-soft drink industry from 2014 to 2018 and linear regression result
250
y = 143.38x - 662.38
R = 0.9989

240
230
220
210
200
190
180
170
5.8

5.9

6.1

6.2

6.3

6.4

31

Team 1
Year
Market share
Market size
KO's market size
Sales in developing market
Year
Market share
Market size
KO's market size
Sales in developing market
Linear regression

2011
2012
2013
2014
56.10
57.20
57.70
57.21
186.20
194.80
205.00
211.57
104.46
111.43
118.29
121.05
13.37
13.84
13.57
13.73
2015
2016
2017
2018
57.46
57.86
58.36
58.97
219.22
226.93
234.71
242.55
125.97
131.31
136.99
143.02
13.81
13.89
13.97
14.06
Sales=KO's market*14.747+11949.3545
Correlation=0.86

Projected KOs market size and sales from 2014 to 2018 in developing market and linear regression result

14100
y = 14.747x + 11949
R = 0.7409

14000
13900
13800
13700
13600
13500
13400
13300
100

110

120

130

140

150

32

Team 1
Year
East Asia & Pacific
Europe & Central Asia
Latin America & Caribbean
Sub-Saharan Africa
Middle East & North Africa
Average GNI per capita
Year
East Asia & Pacific
Europe & Central Asia
Latin America & Caribbean
Sub-Saharan Africa
Middle East & North Africa
Average GNI per capita

2005

2006

2007

2008

1614.41
3492.19
4367.59
770.11
1995.66
2447.99
2009
3151.82
5701.58
6875.52
1114.87
3439.20
4056.60

1866.66
4108.69
4986.46
878.54
2288.58
2825.79
2010
3662.09
6036.05
7613.62
1173.68
3942.24
4485.54

2237.72
4837.42
5825.18
976.03
2659.60
3307.19
2011
4204.94
6328.64
8251.34
1248.52
4518.34
4910.36

2725.07
5668.39
6704.38
1087.71
3148.91
3866.89
2012
4884.34
6691.01
8981.04
1350.57
5160.59
5413.51

GNI per capita in developing markets

Categories
Low income
Low middle
Upper middle
High income

Standards

$1035
$1036-$4085
$4086-$12615
>$12616
UNs method to categorize countries into different groups
Appendix 24 Developing market model

Year
Per capita consumption
GNI per capita
Year
Per capita consumption
GNI per capita
Linear regression

2010
2011
2012
2013
2014
184.75
193.5
202.66
212.26
225.48
4485.54
4910.36
5413.51
6067.70
6800.93
2015
2016
2017
2018
239.69
255.63
273.49
293.51
7622.78
8543.94
9576.41
10733.66
Per capita consumption=0.0173*GNI per capita+107.82
Correlation=0.99

Projected per capita consumption of KOs products in developing countries from 2014 to 2018 and linear regression
result

33

Team 1
310
y = 0.0173x + 108.15

290
270
250
230
210
190
170
150
4400

5400

6400

7400

8400

9400

10400

11400

Appendix 25 Survey Results

Soda Preference
I don't drink soda
28%

32%
I prefer diet over
regular soda
I prefer regular over
diet soda

40%

What's the primary reason you do not

drink soda?
5%

General health
concerns

10%

Number of calories
85%

Taste

34

Team 1
How important do you find the following
factors when purchasing soda? [Brand
Name]
17%

Neutral

34%
14%

Not Important At All

Somewhat Important
Very Important

35%

How important do you find the following

factors when purchasing soda? [Taste]
4%

20%

Neutral
Somewhat Important
Very Important

76%

How important do you find the following

factors when purchasing soda? [Number
of Calories]
Neutral

17%

Not Important At All

36%
18%
20%

9%

Not Very Important

Somewhat Important
Very Important

35

Team 1
How important do you find the following
factors when purchasing soda? [Type of
Sugar Substitute]

18%

Neutral

21%

Not Important At All

Not Very Important
20%

25%

Somewhat
Important
Very Important

16%

Would you purchase a soda MADE WITH A

NATURAL ZERO-CALORIE SWEETENER
(instead of aspartame)?
11%

Definitely will buy

25%

Definitely will not buy

19%

Probably will buy

15%

Probably will not buy

Undecided

30%

Do you own a Soda Stream?

14%
No
Yes
86%

36

Team 1
Would you purchase an in-home soda maker,
similar to a Keurig home coffee maker?
3%
Definitely will buy

19%
38%

Definitely will not buy

Probably will buy
Probably will not buy

30%

Undecided

10%

Which of the following products do you

drink and how often do you drink them?
[Coke]
5% 2%

Never

14%

Less than once per

month
51%

28%

1-3 times/month
2-3 times/week

Which of the following products do you

drink and how often do you drink them?
[Diet Coke]
Never
9%

5%
Less than once per
month

10%
54%

1-3 times/month

22%
2-3 times/week

37

Team 1
Which of the following products do you
drink and how often do you drink them?
[Coke Zero] Which of the following products
do you drink and how often do you drink
them? [Coke Zero]
3%

2%

Never

11%

Less than once per

month

15%
69%

1-3 times/month
2-3 times/week

Which of the following products do you

drink and how often do you drink them?
[Fanta]
4%

0% 0%

15%

Never
Less than once per
month
1-3 times/month

81%
2-3 times/week

38

Team 1
Which of the following products do you
drink and how often do you drink them?
[Minute Maid]
0% 1%

1%

Never

7%
16%

Less than once per

month
75%

1-3 times/month

Which of the following products do you

drink and how often do you drink them?
[Sprite ]
2%

1%
Never

13%
Less than once per
month
25%

59%

1-3 times/month
2-3 times/week

Which of the following products do you

drink and how often do you drink them?
[Smart Water]
4% 2%

Never

15%
17%

Less than once per

month
62%

1-3 times/month
2-3 times/week

39

Team 1
Which of the following products do you
drink and how often do you drink them?
[Schweppes ]
1% 1%

1%

Never

9%
Less than once per
month

20%

1-3 times/month
68%
2-3 times/week

Which of the following products do you

drink and how often do you drink them?
[Fuze Tea ]
0% 1%

3%

1%
Never

9%
Less than once per
month
1-3 times/month
86%

2-3 times/week

Which of the following products do you

drink and how often do you drink them?
[Odwalla Juice ]
1%

0% 2%

Never

7%
Less than once per
month

16%

1-3 times/month
74%
2-3 times/week

40

Team 1
Which of the following products do you
drink and how often do you drink them?
[Honest Tea]
1%

5%

2%

1%
Never
Less than once per
month

21%

1-3 times/month
70%
2-3 times/week

Which of the following products do you

drink and how often do you drink them?
[Vitamin Water ]
2% 2% 0%

Never

14%

Less than once per

month
1-3 times/month

27%

55%
2-3 times/week
Once a day

41

Team 1
Would you consider buying a smaller serving
size of a beverage product than what you are
currently purchasing?

46%

Yes
No

54%

What would make you consider purchasing a

smaller product size?
Lower cost
13%

14%
Fewer calories per
serving
21%

30%

Current packaging
options are too large for
me
21%
1%

More appropriate size

for children
I wouldn't consider
purchasing a smaller
product size

42