Name That Trade – $KO: Soda Pop?

by Enis June 18, 2014 1:36 pm • Commentary

KO is flirting with a new one year high this month.  Well-known value investor David Winters caused a flurry of activity in Coca-Cola shares yesterday after an interview with Maria Bartiromo, including the following quote (full transcript at ValueWalk):

David Winters on whether there is any other reason Buffett is looking to take Coca-Cola private:

“He is looking for a big deal, he’s made a public statement, he’s praised 3G, he’s swimming in cash and he loves consumer product companies and loves Coke. And remember he has not done anything – he has friends on the board, he’s son is on the board. He did nothing to stop the plan.”

Mr. Winters is an experienced investor who wrote a letter to Coke’s board expressing his concern about a potential Leveraged Buyout.  His evidence is hardly concrete, but he clearly has strong suspicions since he is willing to take his thoughts to the public sphere.    

The stock’s reaction has been relatively tepid, though, given the headlines.  KO has hardly moved over the past month, and remains below the $41.50 high of the past year (in red):

[caption id="attachment_41898" align="alignnone" width="600"]KO daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg KO daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg[/caption]

Now, even a breakout would not mean a new all-time high for KO.  KO’s all-time high is actually from July 1998, when KO reached a high of $44.46:

[caption id="attachment_41899" align="alignnone" width="600"]KO monthly chart, Courtesy of Bloomberg KO monthly chart, Courtesy of Bloomberg[/caption]

KO has not appreciated over the past 2 years, greatly underperforming the broader market advance. However, the stock is still less than 10% from a new all-time high, and many traders certainly have their eye on the $43-$44.50 resistance area if KO gets above $41.50 in the coming months.

However, KO’s fundamental situation does not look attractive.  Analysts expect flat EPS growth in 2014, though projections are for 7-8% growth over the next couple of years.  At a 20x P/E, that’s hardly an exciting prospect for shareholders.

As a result, some sort of corporate action is likely the main catalyst that could push the stock to a new all-time high over the next year.  Most market participants clearly don’t take Mr. Winters seriously, as implied volatility is still near 2 year lows:

[caption id="attachment_41895" align="alignnone" width="600"]KO 30 day implied volatility, Courtesy of Bloomberg KO 30 day implied volatility, Courtesy of Bloomberg[/caption]

Options are priced quite cheaply, which would not be the case if investors expected a potential bid over the next 6 months.  For example, the Nov 43 calls are priced at 0.70, hardly expensive if an LBO really is in the works.

If Mr. Winters really believed that a buyout was a distinct possibility, he should get involved on those upside calls.  At a $180 billion market cap, KO is probably too big to be taken private, and the market is not taking Mr. Winters seriously as a result.