‘Coca-Cola Consolidated, Inc.’ is a $3.4 billion market cap business that trades under the ticker symbol (NASDAQ:co*kE).
Despite its name and ticker giving the strong impression that it might be an official part of ‘The Coca-Cola Company’ (NYSE:KO), it is in fact just one of the many Coca-Cola bottlers that do the capital-intensive work of converting the concentrates, beverage bases and syrups sold by KO into drinks, and distributing them to retailers.
The shares are currently trading at a huge premium to other listed Coca-Cola bottlers, and this distorted valuation appears to be coming from investors becoming confused by co*kE’s name and ticker.
This valuation is unsupported by the fundamentals, as we believe it is likely to collapse when the market as a whole realizes the confusion that the name change, and ticker have caused. Simply returning to the average P/E multiple at which peers are trading would mean downside of ca. 40% - but a disorderly exit by investors realizing the confusion caused by the name change could mean an even more violent selloff.
A long list of corporate governance red flags at the company further undermines the lofty valuation, including the CEO and companies of which he is a beneficial owner receiving in pay and related party leases more than double the total amount the company pays in dividends.
We also believe that KO – a 27% shareholder in co*kE – is unlikely to allow this situation to persist, and we are publishing an open letter to the Board of Directors at co*kE bringing this situation to their attention, and providing recommendations on how they can work to resolve it.
You can find the open letter here.
The Name Change:
Until the start of 2019, co*kE was called ‘Coca-Cola Bottling Co. Consolidated’ – which made it quite clear that the company was a bottler, and not the main KO business.
Then, on 02/01/19, Coca-Cola Bottling Co. Consolidated announced that it had changed its name to ‘Coca-Cola Consolidated, Inc.’.
Source: co*kE, Press Release, 02.01.19
Why would a company which trades under a ticker symbol that already means that it is easily confused with KO change its name to something that means that investors are even more likely to confuse it with KO?
The press release announcing the change did not give any explanation for the new name, but the company’s CEO, Mr. Harrison provided comments to the Charlotte Business Journal claiming that the change was intended to “simplify” the name of the company.
It is, in a way, technically true that ‘Coca-Cola Consolidated’ is a slight ‘simplification’ vs. the previous name, but this is clearly a questionable reason to change the name to something that creates such a clear risk of confusing retail investors.
This is a CEO who at the time of the name change was fully aware of the fact that co*kE and KO were frequently confused; as mentioned in the Charlotte Business Journal article:
Source: Charlotte Business Journal
Even without this admission – Mr. Harrison has been an executive at a publicly traded company for more than 25 years, and so should surely know better than to rename his company in a way that is likely to confuse investors.
We are not accusing the company of any dishonest intentions in making the name change; but it was clearly a rather silly thing to do, given the widespread confusion it has caused in the market.
The Name Change Confuses the Market:
The tweets below are just a small sample of the evidence of investors (and even a news organisation) confusing co*kE with KO:
Source: Twitter, all dates 2019
Even financial journalists get the companies mixed up:
Source: Investopedia.com
Source: Yahoo! Finance
Source: TheStreet.com
Less-informed investors looking to invest in KO are at significant risk of investing in co*kE instead, as the confusing ticker, combined with the even more confusing new name means that searches for ‘co*ke’ on most retail-friendly data sources (a perfectly rational search for a reasonably intelligent layman looking for KO to make) returns results for co*kE:
Source: Morningstar.com
Source: Reuters.com
Source: Marketwatch.com
Source: Yahoo! Finance
Since the name change, co*kE shares have seen an extraordinary run of performance vs. KO, despite having performed similarly in the two years before. The fact that the extreme out-performance started almost exactly when the company changed its name suggests very strongly that this was the catalyst.
Source: StockCharts.com
The website ‘RobinTrack.com’ makes it possible to see how many Robinhood users (a commission-free brokerage popular with younger investors) own particular shares on their platform. In terms of the number of Robinhood holders per $bn of market cap, co*kE is grossly over-owned by users of Robinhood.
Source: Noster Capital, data from Robintrack.com as of 07/08/19
There is no rational reason for this disproportionate level of interest from retail investors in co*kE beyond the idea (backed up by the evidence above) that they are confusing it with KO and have inadvertently invested in the wrong company.
Extreme Valuation:
Unfortunately, this confusion-driven outperformance has driven the shares up to an extreme valuation.
The chart below compares the P/E ratio of co*kE to the average P/E of a series of other listed Coca-Cola bottlers (Coca Cola European Partners, Coca Cola HBC, Coca Cola Amatil, Coca Cola FEMSA) over the last 10 years.
Source: Noster Capital, Bloomberg
Not only is co*kE trading at a much higher P/E ratio (more than 50x P/E!) than any of its comps, it is trading at a higher multiple than the average of these comps. has traded at, at any time in the past 10 years.
The chart above shows trailing P/E; and it is true that co*kE has recently posted Q2 results that were well-received by the market, but even looking at consensus expectations for forward earnings, co*kE is grossly overvalued.
Source: Consensus Estimates, Noster Capital
Perhaps more startling than this is the fact that co*kE is trading at a 32% premium to KO itself on 2020 P/E. It is not impossible for a bottler to trade at a higher multiple than KO, despite KO having a superior business model – but this would require the bottler to be in a period of rapid growth, which co*kE is not.
Source: Consensus Estimates, Noster Capital
If co*kE was to trade at the same multiple of 2020 earnings as the average of these comps. (and we think that consensus estimates for co*kE are on the optimistic side), then there would be 41% downside from the current price.
However, if the catalyst for co*kE losing its current lofty valuation is the market realizing that the share price has become distorted by retail investors buying co*kE shares on the misapprehension that they are buying KO, the down-move could be even more pronounced than this.
Is it possible that co*kE deserves this valuation?
But maybe co*kE is just a much better business than these comps. and really deserves a higher multiple?
The data suggest otherwise.
The chart below shows the gross margins achieved by co*kE for the last 10 years, vs. the average of the same group of comps. Although it managed similar gross margins to these comps until 2016, they are now materially worse:
Source: Noster Capital, Bloomberg
co*kE’s operating margin has historically been much lower than other bottlers:
Source: Noster Capital, Bloomberg
And so have its net profits:
Source: Noster Capital, Bloomberg
co*kE is clearly not a superior business to comparable bottling companies.
On top of this, the company is struggling to grow; with the 2018 10-K disclosing that it achieved just 0.1% in organic volume growth in 2018.
With the current health living trend in the USA continuing to grow, there may also be serious headwinds to co*kE’s key products. Several European countries have recently introduced sugar taxes to discourage excessive drinking of sugary drinks – and parts of the USA, including Philadelphia have followed suit. Any expansion of this movement could be a headwind for co*kE.
Q2 2019 results showed 4.4% revenue growth, but this came from a 3.9% rise in revenue per case – with only 0.4% volume growth. The increase in revenue per case is positive – but represents the y/y impact of a price rise instituted in H2 2018. When the company reports Q3 and Q4 results, y/y comparisons will become more difficult.
Source: Noster Capital, co*kE filings.
Will the company be able to achieve further price rises? With 22% of sales going to just two customers in 2018 (Kroger and Wal-Mart), and with these customers likely having stronger bargaining power than co*kE in any future negotiations on price, it seems likely that it will be difficult for co*kE to achieve much better pricing.
Questionable Corporate Governance:
As well as being dramatically overvalued, and on top all of the evidence that the market is confusing co*kE with KO, co*kE displays a series of corporate governance red flags.
Even if the company’s shares weren’t extremely overvalued, and even if they hadn’t made an inexplicable name change that seems to have confused the market, these red flags would be enough for us to avoid any investment in the company.
Excessive CEO Compensation: Total compensation for co*kE’s CEO has been in excess of $10m in each of the last 3 years. On top of his personal compensation, the CEO is also a beneficial owner of two buildings (co*kE’s corporate HQ and a “production center”) which are leased by the company.
The chart below shows the CEO’s total comp, plus the amount paid by the company on these related party leases in each of the last three years vs. the total cash dividends paid to shareholders.
Source: co*kE 10-K and Proxy, Noster Capital
In each of the last 3 years, these payments have been more than double the dividends paid out to shareholders.
Since 2015, co*kE has been able to find the resources to increase the amount spent on CEO compensation and related party leases by 24.6%, although unfortunately they have been unable to do the same for the dividends paid out to shareholders.
Source: co*kE 10-K and Proxy, Noster Capital
The CEO’s family controls a super-majority of shareholder votes: The CEO, Mr. Harrison, and his family own super-voting shares, which give them 86% of the voting power of the outstanding capital stock.
Source: co*kE, 2018 10K
This dual share-class structure leaves ordinary investors with very limited ability to influence the company.
The Board of Directors is packed with family members of the CEO: Over the years in which we have been investing in public companies, we have found it a good rule of thumb to avoid any company (including family-controlled companies) where there are more than 2 members of the same family on the Board - and even when there are only 2, this is only acceptable when the family members have strong, relevant business experience.
Both the sister and the daughter of co*kE’s CEO hold board seats at the company.
Source: co*kE Proxy Statement, 2019
The proxy statement claims that rules governing the Harrison family trusts require Mr. Harrison to vote the trust shares in favour of his sister being on the Board – but this doesn’t make the family-concentration on the board any more acceptable for investors. It just means that investors are stuck with it forever. According to the 2019 Proxy, Mr. Harrison’s sister takes an annual fee of $150,000 for her service on the Board.
The rules of the trusts do not appear to require Mr. Harrison to elect his daughter to the board – which makes her presence even less acceptable.
Ms. Everett was elected to the board in 2011; only 8 years after graduating with a B.A in Communications. From the information in the co*kE press release announcing her election, she does not appear to have held a professional job at any other company – making it difficult to see what relevant experience she has that could justify a Board seat at a $3.4bn market cap public company.
Corporate Jet: Despite its relatively small size, co*kE owns a corporate jet, and allows the CEO to use it for personal travel.
Source: co*kE Proxy Statement, 2019
Amazingly, the company attempts to justify this jet by suggesting that flying commercial is somehow insufficiently safe or secure for their CEO…
Source: co*kE Proxy Statement, 2019
Other executives are permitted to use the jet; but only with Mr. Harrison’s permission – which strongly suggests that this is effectively his personal aircraft.
Source: co*kE, Proxy Statement, 2019
What’s more, only part of the cost of the corporate jet is disclosed to shareholders. Despite this aircraft appearing to be a personal perk for Mr. Harrison, only the ‘incremental cost’ of the actual flights taken is disclosed as part of his compensation (the 2019 proxy form disclosed $238,521 in such costs for 2018). All other costs of ownership are excluded.
Source: co*kE Proxy Statement, 2019
We believe that we have identified the corporate jet through publicly available sources as a Cessna 560XL with the N-number N902FH.
Source: FAA Registry
Unfortunately, the company has chosen to block the plane from publicly accessible flight-tracking systems – meaning that the shareholders whose money is paying for it to fly, including for “personal travel”, are denied oversight over how their capital is being spent.
Source: FlightAware.com
It’s one thing to spend shareholders' money on a corporate jet that can be used for “personal travel”. It is another to hide from them how it is being used.
But is there a catalyst?
At the same time as publishing this article, we are publishing an open letter to the Board of Directors at KO.
KO owns approximately 27% of co*kE’s share capital, and although it is difficult to imagine why they have allowed the confusing name change, and ticker symbol to persist for so long, they have a clear interest in helping to resolve it.
- KO surely does not want investors who would really like to buy KO stock buying co*kE stock instead.
- If the confusion driven by the confusing name and ticker at co*kE unwinds in a violent way, there is likely to be negative publicity for KO for having let this this situation go on for so long without intervening.
- The corporate governance issues at co*kE, and various public positions taken by the CEO of co*kE do not match KO’s corporate image, and if the general public interpret things done by the CEO of ‘Coca-Cola Consolidated’ as being directly connected to ‘The Coca Cola Company’, there could be further negative publicity.
We encourage all investors to read our open letter to the Board of Directors at KO (linked above), and if they agree with us about the risks the confusing name change and ticker at co*kE pose to private investors, to write their own.
Although we are not accusing co*kE of having any dishonest intention in making the name change that has so confused the market, it is clearly having negative consequences, including distorting their share price – and should not be allowed to continue.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
This article was written by
Pedro de Noronha
301
Follower
s
Pedro de Noronha is the Managing Partner and Portfolio Manager at Noster Capital.Before forming Noster Capital in September 2007, Pedro de Noronha managed the European Special Situations Portfolio for the Proprietary Positioning Business at JP Morgan, where he was employed from 2003. Prior to this, Pedro de Noronha was a mergers and acquisitions analyst for the energy team and global debt markets associate covering Portugal and Italy at Merrill Lynch.Noster Capital was formed in September 2007 and is a London based hedge fund which invests globally following a value investing philosophy focusing on absolute returns. Noster was largely profitable during the string of the worst months of the financial crisisThe Noster Capital Fund was launched in March 2008 and is a Global Value Fund which invests in both long/short strategies along with other asset classes.The fund is a value investing fund; it typically invests in equities offering value opportunities relative to intrinsic value, and the exposure is hedged against the market, depending on the stage of the market cycle and on the manager’s view of overall market conditions. The fund invests in any asset class and any cap, and also invests in unlisted investments.
Analyst’s Disclosure: I am/we are short co*kE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
