5.5 Example:  KO versus PEP and the PEG Ratio Using Consensus Analyst Forecasts

The current analyst earnings forecasts midway through 2010 were:

The consensus forecast for earnings growth over the next 5-years respectively for KO and PEP are:  9.0% and 10.0%.  So PEP is expected to grow faster than KO although both KO and PEP are expected to lag their respective industry growth rates.

From the earlier example the Forward P/E Ratios for KO and PEP were:

The market is valuing growth more highly for KO than PEP.  Earlier 2010 KO had implemented a major shift in its investment strategy by acquiring its bottling plants.  This brought KO in line with PEP’s investment strategy.  It was designed to provide KO with a lot more marketing/production flexibility by being able to more quickly respond to regional pricing and labeling adjustments required to counteract PepsiCo’s strategies.  As a result, the market appears to be pricing in a higher potential for KO’s growth than was currently the case for PEP. 

Did KO achieve its potential?

In the next example we shift forward in time and illustrate how to work with Quarterly Financial Statements to construct current price ratios.

Valuation Tutor and Quarterly Financial Statements

In practice there are different types of P/E ratios.  For Coca-Cola, Dr Pepper and PepsiCo:

Formally, there are three major types are:

The advantage of the second versus the first is timeliness.  For example, in May 2010, the first quarter financial results are available and so the trailing four quarters are Qtr 1, 2010, Qtr 4 2009, Qtr 3 2008, Qtr 2 2009.  The third ratio looks ahead; the 1 year forecast is for 2010 covers Qtr 1 2010, Qtr 2 2010, Qtr 3 2010 and Qtr 4 2010.

To set up the above screen required the following steps:

Step 1:  Click on View Filings and select SEC Filing Viewers at Bottom and then select SEC Filings Viewer at Right.  This lets you bring in the required three statements simultaneously.

Step 2:  Filing Date select the following three dates respectively. 

02 May 2011 10-Q (3-months ending April 1, 2011);  28 February 2011 10-K (12-months ending Dec 31, 2010);  29 April 2010 10-Q (3-months ending April 2, 2010)

Trailing Twelve Months (TTM) = April 1, 2011 (3-months) + (Dec 31, 2010 (12-months) – April 2, (3-months);

Computing TTM Net Income Attributable to KO Shareholders = $1900 + ($11,809 - $1,614) = $12,095.

June 30, 2011 KO closed at $67.29 per share and from the 10-Q Balance Sheet for April 1, 2011 the latest estimate of shares outstanding was:  3,520 less Treasury Stock equal to 1,233 = 2,287

The TTM EPS = $12,095/2,287 = $5.2885

P/E (Trailing 12-months June 30, 2011) = 67.29/5.2885 = 12.72.

The consensus 5-year’s growth forecast for KO around this time 9.0% and so the PEG ratio is:

PEG (Trailing 12-months June 30, 2011 = 12.72/9.0 = 1.41.

Since the earlier example, KO’s stock price has increased along with its earnings.  Overall current P/E ratios have fallen including the PEG ratio.

Suggested Exercise:  Compute the TTM P/E and PEG ratios for PepsiCo and Dr Pepper Snapple to assess which stock is relatively cheaper.  PEP’s 5-year growth forecast is 8.3%, June 30 closing price = $70.43 and DPS is 10.5% and June 30 closing price = $41.93.