Warren Buffett has held Coca-Cola (KO) stock since 1988, and it still is one of his favorite holdings.
But since our proprietary algorithms tend to identify opportunities on a much shorter timeframe (as in, not forever), the company only recently popped to our screens. Over the past month, the stock hit support above its 52-week low ($35.58) – and bounced from $37 to close Tuesday at $39.09.
During this run higher, the stock gained past its 50-day moving average ($38.28), though it still trades below the 200-day MA ($40.17). On a more technical front, the stock also seems to have formed some bullish candlestick patterns on the daily chart, while the overall price broke above the top of the red downtrend line. The stock has recorded two weeks of appreciation and there is also a bullish signal on the MACD indicator (circle on the bottom chart). Combined, these paint a short-term bullish picture for KO.
FUNDAMENTAL OUTLOOK
Coca-Cola’s trailing price-to-earnings ratio stands at 20.26, in line with the industry average of 20.45 and above the S&P 500 average of 18.32. KO is trading above our target P/E of 15. Over the last five years, the company’s shares have traded in the range of 12.04 to 22.57 times trailing 12-month earnings.
KO’s current Price/Sales of 3.6 is above the average of its industry, of 0.93. KO’s head-to-head comparison to its main competitors shows that the company has highest gross margin; moreover, the company has a superior operating margin, which is also much higher than the industry average.
The PEG ratio is second highest in comparison to the competition, and slightly higher than the industry average, showing that investors are giving more or less equal growing opportunity to the company with regards to the competition. The stock is currently trading below its intrinsic value of $49.99, suggesting that the stock is undervalued at these levels.
Coca-Cola has shown favorable earnings consistency over the last five years. Furthermore, KO’s earnings per share over the last five years have experienced growth of 9.61 percent. The current quarter earnings increased by 8 percent, compared with the same quarter last year, which is below the required level of 15 percent. The company’s total debt to equity ratio is 111.53, which is above our targets but below the industry average (212.41).
OPTIONS STRATEGY RECOMMENDATION
Technical and fundamental indicators both show short-term bullish signals for KO. To take advantage of an impending up-move, traders could consider the following debit call spread: Buy November 2013 $39 call and sell the November 2013 $40 calls for a net debit of $0.39. We believe KO will trade above $40 at expiration, giving traders profit of roughly $0.61 per share. The potential loss is just what the trader paid for the spread – $0.39 per share.
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