Description
Thesis:
I recommend the purchase of Coca Cola Consolidated Inc (ticker symbol is COKE.) at $981.17.
THIS IS A BOTTLER, NOT THE COCA COLA COMPANY OF ATLANTA which is owned by Buffett!!!
It is an excellent opportunity to buy a decent business at twelve times 2025 net income, with low debt levels, where management clearly believes that the stock is materially undervalued. The investment has tailwinds of earnings momentum, price momentum, low P/E, and insiders drastically increasing their stake – a cocktail that historically boded very well for future stock returns.
Description
The company has been written up three times on VIC, so this section will be very brief. (Limited Downside made a brilliant long pitch on 09/16/2016 at $143.85, UCB1868 recommended it as a long at 202.12 on 11/13/2017 and carbone959 suggested shorting it at $258.47 on 11/15/2020.)
The company is a Coca Cola bottler in the United States. It has achieved an incredible operational turnaround over the past half a dozen years. The debate and the crux of carbone’s short thesis is that demand for soft drinks will decline, that margin improvement is not sustainable, and that margins will decline.
What has changed since the last write-up three and a half years ago?
The operational improvement has continued. The management has been quietly via the 10-Ks and 10-Qs regularly telling people that its projections of future profitability have increased. The company has also been saying that it is investing aggressively in cap ex to take advantage of future growth.
On May 6th 2024, the company announced its plan to buy-back 35.7% of shares outstanding at a price of between $850 and $925 per share, and that CEO and his family that owns roughly 11% of s/o will NOT participate in the tender offer.
Clearly the management believes that the profits of the business are sustainable and will likely grow in the future, otherwise why would they try to lever up the company to buy-back 35.7% of the company and more than 40% of shares not owned by them?
Valuation
At 981.17 per share, the company has an EV = $9.2bn or 11.05x 2023 EBIT and 9.2x my estimate of 2025 EBIT.
Management
People have criticized the management, justifiably so for very high salaries and nepotism, however this management team has been able to drastically improve profitability. So perhaps a B+?
Family control
The family of the CEO owns around 11% of s/o and 70% of the voting rights. That is clearly a negative since he can pretty much do whatever he wants. Historically paid himself too much in my opinion.
Capital allocation
Historically been excellent – the purchase at a very attractive price of Coca Cola territories in 2016-2017, paying down debt and paying dividends, albeit small. Company did pay a special dividend of $16 per share in Q1 of 2024.
Capital structure
Before the tender offer, the company had essentially zero net debt, and roughly 9.372MM s/o. The s/o include 1,004,394 shares of super-voting Class B owned by the CEO and his family.
Expected returns
Assuming that no shares are tendered, the stock is trading at an 8.7% earnings yield, so I would expect an annual return of at least inflation + 8.7%. Given that the company is raising debt at under six percent, any shares repurchased will be accretive to EPS.
Given the signalling effect of the management’s tender offer, I expect that the company will both grow the top-line ahead of inflation and that it will be able to expand margins further. So I expect at least a fifteen percent annual return for the foreseeable future without any multiple expansion.
Risks
- Management significantly misjudged the prospects of the business
- Relationship with Coca Cola Company deteriorates and more of the economics get transferred to Coca Cola
- Insiders decide to enrich themselves at the expense of public shareholders thanks to their voting control
Conclusion
An opportunity to buy a consumer staples business that has tremendous operational momentum, where insiders are drastically increasing their stake in the business, with the stock enjoying low p/e and price momentum.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Catalyst
- The bright future that seems to be foreseen by the insiders materializes over the next year or two.
- Further returns of capital to shareholders, given that the stock will be trading at a nearly double digit earnings yield, with relatively low leverage.