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Individual Assignment
The Coca-Cola company is carbonated beverages which founded in 1892. Until now
there are more than 2800 kind of product and more than 200 country. Coca-Cola is the
largest beverage manufactural and distributer in the world and one of the largest
corporations in the United States. In 2013, the trademark of Coca-Cola worth $79.2
billion rank the third most valuable brand according to (The New York Times, 2013)
In the report below, we will calculate the stock return, standard deviation and also
intrinsic value. There are several reason and driver why I choose Coca Cola.
1. Strengthen of USD
Coca Cola is trade in NYSE in US currency. Although we found that Coca Cola
return is slightly lower than then market (SP500) but if we convert USD to MYR the
return of Coca Cola will be higher than the market. Beside that, the dividend is paid
out in USD, so if the US currency appreciate against MYR, as an investor we will
benefit from the transaction gain. There are several reasons why USD will appreciate
in the future for example the strong growth of US GDP.
The second reason why I choose Coca Cola is due the dividend payout. The company
has a track record of 80% payout for the past 5 years. Other than that, the dividend
experienced a high growth (6.55%) for the past 5 years and are expected to sustain for
a long time. The dividend is in US currency, we will have an extra return if the USD
appreciate.
Coca Cola can be classified as a defensive stock which is not high affected by the
market cycle, so it is relative safe to invest compare to other stock. With a beta of
0.62, Coca Cola price movement is not affected by the market movement.
Securities Analysis
Return
Return is calculated by using this formula which is HRP holding period return
P = Ending price
1
Coca-Cola SP500
Expected Monthly Annualized Monthly Annualized
return
0.6603% 8.2174% 0.7897% 9.8995%
Risk
Risk of a stock can be measured by variance and standard deviation of the stock
Coca-Cola SP500
Monthly Annualized Monthly Annualized
Variance 0.001444 1.7328% 0.00080391 0.9647%
Standard
deviation 0.038 13.1637 0.0283533 9.82188%
Intrinsic Value
Intrinsic value is a to calculate a underlying asset ‘real’ value include tangible and
intangible asset. For Coca Cola, I used Gordon Growth Model to calculate the
intrinsic value. The Gordon Growth Model, also known as the dividend discount
model (DDM).
1. Dividend Growth
Coca Cola dividend growth at a high rate 6.55% in the past 5 year. We assumed that
this dividend growth will sustain for a long time.
2. Cost of Equity
We compute the cost of equity using the CAPM formula (rf+B(Equity Premium)).
The risk free rate we use the US Treasury Bill, while the Beta and Equity Risk
premium we extract from Thomsan Rueter and Damodaran.
Fundamental Analysis
Financial Ratio
I have extract Coca Cola past 5 years ratio and average it to get a forecast 2018F
financial ratio. All the ratio is extract from Thomson Reuter Eikon. A financial ratio
or accounting ratio is a relative magnitude of two selected numerical values taken
from an enterprise's financial statements.
1. Profitability
From the ratio above, we can see that Gross Margin, EDITBA Margin, Operating
Margin, Pretax Margin and Net Margin for the past 5 years are higher than the
industry average. Gross Margin remain stable for the past 5 year at around 60% and
we forecast the ratio for next year is 61.12%. EBITDA margin are quite stable in past
5 years and reached 30.30% in 2017. Operating Margin decrease in the first 3 years
and increase in the next 2 years to 28,40%. Net Profit Margin is double the industry
but there is a significant drop in the past 5 years.
Coca Cola has lower effective tax rate in the past 5 years except 2017 which is
slightly higher. ROA decrease in the past 5 years from 13% to 7.7% which show not
efficiency in using asset to generate return. However, ROE for the past 5 years is
higher than the industry median.
2. Liquidity
Coca Cola’s quick ratio for the past 5 years is above the industry median. There is a
decrease in 2014, then increase for the following years.
For Current Ratio, Coca Cola past 5 years ratio is lower than the industry but there is
an upward trend for the past 3 years.
Time interest earned ratio is also interest coverage ratio. Coca Cola has very high
interest coverage ratio compare to the industry although there is a decreasing trend in
the past 5 years.
Cash Cycle of Coca Cola is very high for the past 5 years which is not good to the
company. Coca Cola need reduce the day in collecting receivable and lengthen the
day to pay the account payable.
3. Leverage
Based to Coca-Cola Asset to Equity ratio, we can see that Coca-Cola is taking more
leverage in investing in asset. 3.64 which is more than industry mean which is only
2.58 indicates that it is more risk. Debt to Equity ratio as well show the same situation
as Asset to Equity. Long term debt to total capital is also shows 36.8% higher than
industry means Coca-Cola mostly finance by debt. In (total debt – cash) / EBITDA
show some good sign which 1.794 lower than industry ratio which is 2.04.
4. Operating
The average account receivable days show 36.5 means it takes 36.5 days to collect
account receivable which is more efficient than industry ratio. Coca- Cola have
average inventory days of 65.72 means need 65.72 to used up the inventory which is
poorer than industry. For ROIC, there is a decrease in these 5 years but in prediction
there will be an increase of 11.34 % next year.
One Factor Regression
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.492078554
R Square 0.242141304
Adjusted R Square 0.229074774
Standard Error 0.03336507
Observations 60
ANOVA
df SS MS F Significance F
Regression 1 0.02062969 0.02063 18.53141711 6.517E-05
Residual 58 0.064567218 0.001113
Total 59 0.085196908
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.001394352 0.004474105 0.311649 0.756424569 -0.007561542 0.010350246 -0.007561542 0.010350246
SP 500 0.659502619 0.153201215 4.304813 6.517E-05 0.352837069 0.966168169 0.352837069 0.966168169
Interpretation:
1. β SP500 = 0.6595 indicates that an increase of 1% in the industrial production index
will cause a decrease of 0.6595% in Coca-Cola’s return.
2. In this analysis 95% confidence level is used.
95
α = 1- 100
= 0.05
4. The R2 of the model is 0.229074774. The model explains as much as 22.91% of the
variations in the dependent variables around the mean.
Multi Factor Regression
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.523681449
R Square 0.27424226
Adjusted R Square 0.221459879
Standard Error 0.033529449
Observations 60
ANOVA
df SS MS F Significance F
Regression 4 0.023364593 0.005841148 5.195715962 0.001268567
Residual 55 0.061832315 0.001124224
Total 59 0.085196908
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -0.004391204 0.006058 -0.724860297 0.471610404 -0.016531707 0.007749299 -0.016531707 0.007749299
SP500 0.705328856 0.159580462 4.419894824 4.69023E-05 0.385522465 1.025135248 0.385522465 1.025135248
Unemployment -0.071249168 0.175442238 -0.406111829 0.68623622 -0.422843269 0.280344933 -0.422843269 0.280344933
Tbill -12.77200854 8.221681689 -1.553454515 0.126050486 -29.24862684 3.704609761 -29.24862684 3.704609761
Inflation -0.00087599 0.004546647 -0.19266733 0.847929183 -0.009987675 0.008235694 -0.009987675 0.008235694
Interpretations:
1. β SP500 = 0.7053 indicates that an increase of 1% in the return of SP500
index will cause an increase of 0.7053% in MCD’s return.
2. β Unemployment = -0.07125 indicates that a 1% increase in
Unemployment rate will decrease the return of MCD’s by 0.07125%.
3. β T bill= -12.7720 indicates that a 1% increase in the T Bill rate will
decrease the MCD’s return by 12.7720%.
4. β Inflation = -0.00087599 indicates that a 1% increase in the inflation rate
will decrease the MCD’s return by 0.00087599%.
Appendix
SP500 Index
Exchange Date Close Return
31-Oct-2018 2,750.7859 -0.056003202
30-Sep-2018 2,913.9780 0.004294442
31-Aug-2018 2,901.5176 0.030262879
31-Jul-2018 2,816.2886 0.036021071
30-Jun-2018 2,718.3700 0.00484058
31-May-2018 2,705.2749 0.021610474
30-Apr-2018 2,648.0493 0.002720055
31-Mar-2018 2,640.8660 -0.026886203
28-Feb-2018 2,713.8306 -0.038947099
31-Jan-2018 2,823.8098 0.056178413
31-Dec-2017 2,673.6106 0.009831923
30-Nov-2017 2,647.5798 0.028080967
31-Oct-2017 2,575.2639 0.022189885
30-Sep-2017 2,519.3596 0.019302692
31-Aug-2017 2,471.6501 0.000546533
31-Jul-2017 2,470.3000 0.019349232
30-Jun-2017 2,423.4089 0.004814459
31-May-2017 2,411.7974 0.011576986
30-Apr-2017 2,384.1956 0.009090081
31-Mar-2017 2,362.7183 -0.000389188
28-Feb-2017 2,363.6382 0.037198882
31-Jan-2017 2,278.8669 0.017884457
31-Dec-2016 2,238.8267 0.018199114
30-Nov-2016 2,198.8103 0.034172983
31-Oct-2016 2,126.1533 -0.019425098
30-Sep-2016 2,168.2722 -0.001232089
31-Aug-2016 2,170.9470 -0.001222394
31-Jul-2016 2,173.6040 0.035614081
30-Jun-2016 2,098.8552 0.000901828
31-May-2016 2,096.9641 0.015333247
30-Apr-2016 2,065.2964 0.002697038
31-Mar-2016 2,059.7412 0.065993716
29-Feb-2016 1,932.2264 -0.004130057
31-Jan-2016 1,940.2397 -0.050734052
31-Dec-2015 2,043.9369 -0.01753013
30-Nov-2015 2,080.4067 0.000503424
31-Oct-2015 2,079.3599 0.082984944
30-Sep-2015 1,920.0266 -0.026446864
31-Aug-2015 1,972.1847 -0.062576521
31-Jul-2015 2,103.8354 0.019738921
30-Jun-2015 2,063.1118 -0.021010733
31-May-2015 2,107.3896 0.010489454
30-Apr-2015 2,085.5137 0.008523918
31-Mar-2015 2,067.8872 -0.017398881
28-Feb-2015 2,104.5032 0.054893898
31-Jan-2015 1,994.9904 -0.031041735
31-Dec-2014 2,058.9023 -0.004188363
30-Nov-2014 2,067.5620 0.024532342
31-Oct-2014 2,018.0544 0.023206177
30-Sep-2014 1,972.2852 -0.015515125
31-Aug-2014 2,003.3677 0.037651981
31-Jul-2014 1,930.6740 -0.015078425
30-Jun-2014 1,960.2312 0.019057454
31-May-2014 1,923.5728 0.021031714
30-Apr-2014 1,883.9501 0.00620343
31-Mar-2014 1,872.3352 0.006929955
28-Feb-2014 1,859.4493 0.0431184
31-Jan-2014 1,782.5870 -0.03558264
31-Dec-2013 1,848.3564 0.023559309
30-Nov-2013 1,805.8127 0.028048306
31-Oct-2013 1,756.5446
Regression Statistics
Multiple R 0.492078554
R Square 0.242141304
Adjusted R Square 0.229074774
Standard Error 0.03336507
Observations 60
ANOVA
df SS MS F Significance F
Regression 1 0.02062969 0.02063 18.53141711 6.517E-05
Residual 58 0.064567218 0.001113
Total 59 0.085196908
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 0.001394352 0.004474105 0.311649 0.756424569 -0.007561542 0.010350246 -0.007561542 0.010350246
X Variable 1 0.659502619 0.153201215 4.304813 6.517E-05 0.352837069 0.966168169 0.352837069 0.966168169
RESIDUAL OUTPUT
18 0.009029405 0.044736528
19 0.007389284 0.018058407
20 0.001137681 0.010301785 -0.1 0 0.1 Predicted Y
21 0.025927112 -0.007644696
22 0.013189198 -0.010536038
-0.1
23 0.013396715 0.014112578
X Variable 1
24 0.023931523 -0.07228058
25 -0.011416551 0.021577232
26 0.000581786 -0.026140156
27 0.00058818 -0.005172182
28 0.024881932 -0.054663533
29 0.001989109 0.014378604
30 0.011506668 -0.015970954
31 0.003173055 -0.029902954
32 0.04491738 0.030668059
33 -0.001329431 0.014376962
34 -0.032064888 0.031133789
35 -0.010166815 0.01814429
36 0.001726361 0.004649081
37 0.05612314 0.007685435
38 -0.016047424 0.036393304
39 -0.039875028 -0.002968205
40 0.014412222 0.041157495
41 -0.012462282 -0.029774047
42 0.008312174 0.001549759
43 0.007015898 0.001368813
44 -0.010080256 -0.053430137
45 0.037597021 0.022155225
46 -0.019077754 -0.005791976
47 -0.001367885 -0.056852057
48 0.017573495 0.052865855
49 0.016698886 -0.027833439
50 -0.008837914 0.031369074
51 0.026225932 0.035621867
52 -0.008549909 -0.056723934
53 0.013962793 0.021480864
54 0.015264822 -0.012322925
55 0.00548553 0.057499467
56 0.005964675 0.00607721
57 0.02983105 -0.01171894
58 -0.022072492 -0.062410684
59 0.016931778 0.010935851
60 0.019892283 -0.004223847
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.523681449
R Square 0.27424226
Adjusted R Square 0.221459879
Standard Error 0.033529449
Observations 60
ANOVA
df SS MS F Significance F
Regression 4 0.023364593 0.005841148 5.195715962 0.001268567
Residual 55 0.061832315 0.001124224
Total 59 0.085196908
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -0.004391204 0.006058 -0.724860297 0.471610404 -0.016531707 0.007749299 -0.016531707 0.007749299
SP500 0.705328856 0.159580462 4.419894824 4.69023E-05 0.385522465 1.025135248 0.385522465 1.025135248
Unemployment -0.071249168 0.175442238 -0.406111829 0.68623622 -0.422843269 0.280344933 -0.422843269 0.280344933
Tbill -12.77200854 8.221681689 -1.553454515 0.126050486 -29.24862684 3.704609761 -29.24862684 3.704609761
Inflation -0.00087599 0.004546647 -0.19266733 0.847929183 -0.009987675 0.008235694 -0.009987675 0.008235694
RESIDUAL OUTPUT
KO
KO
0
-0.0030 -0.0020 -0.0010 0.0000 0.0010 Predicted KO
-0.1
Tbill
KO
KO
0
-6 -4 -2 0 2 4 Predicted KO
-0.1
Inflation
0.05
KO
KO
0
-0.1 -0.05 0 0.05 0.1 Predicted KO
-0.05
-0.1
Unemployment
KO
KO
0
-0.1 -0.05 0 0.05 0.1 Predicted KO
-0.1
SP500