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Coca-Cola Enterprises Essay

INTRODUCTION

Coca-Cola Enterprises, Inc was incorporated in 1944 and is based out of Atlanta, Georgia.  They primarily manufacture, distribute, market, and sell non-alcoholic beverages.  Their primary brand names are Coca-Cola Classic, Diet Coke, Sprite, Dasani, Fanta, Schweppes, and Caffeine Free Diet Coke, and Dr Pepper.  They also purchase and resell isotonics, teas, and juices.  Coca-Cola Enterprises, Inc is a global company, with sales primarily in North America, Great Britain, continental France, Belgium, the Netherlands, Luxembourg, and Monaco.

The company provides an excellent product at a reasonable price.  Coca-Cola has diverse company holdings, with various stock trading symbols.  Coca-Cola Enterprises, Inc (CCE) bottles its own products.  Coca-Cola Co (KO) primarily manufactures and distributes the syrups or bases for Coca-Cola products which they sell to bottling partners in over 200 countries.  There are also incorporated Coca-Cola entities in other countries and a small bottling operation based in Charlotte, North Carolina.  This review will focus on Coca-Cola Enterprises, Inc.  Based on personal consumption of Coca-Cola products, this company is one in which I am interested in investing in.

Coca-Cola Enterprises Inc overall Corporate Governance is strong in the Food, Beverage, & Tobacco Industry, performing as well as or better than 87.1% of companies in the same category.  Additionally, they perform better than 39.3% of S&P 500 companies.  Coca-Cola Enterprises, Inc. employs 73,000 people full-time.

Coca-Cola’s primary competitors are Cadbury Schweppes PLC, Pepsi Bottling Group Inc, and Pepsico, Inc.  Coca-Cola Enterprises, Inc has a lower quarterly revenue growth than its competitors, and its net income is also less than all competitors, except Pepsi Bottling Group, Inc.  In 2005, Coca-Cola Enterprises, Inc had a lower net income to apply to common shareowners at $1.08 per share, compared to $1.26 in 2004.

During the latter part of 2005, Hurricanes Katrina, Rita and Wilma negatively impacted operations in certain areas. Damage was sustained at several of our production and distribution facilities, large quantities of vending equipment and inventory were damaged or destroyed, and sales were lost in several key markets. In the aftermath of the hurricanes increased costs were also experienced, including higher fuel prices, nonproductive labor expenses, outsourced services and extra storage space charges.

Additionally, in 2005 the company underwent a major restructuring of the North American Division into 6 United States business units and Canada.  This restructuring was done in order to respond more quickly to changes in local markets as consumers and consumption trends are becoming more complex.  The restructuring had the greatest impact on the operating income for 2005.  This one time charge should not be repeated in 2006.

In 2005 and continuing into 2006, Coca-Cola Enterprises, Inc is implementing SAP software.  $58 million was spent in 2005, of which $35 million was capital costs.  In 2006, another $22 million is expected to be spent.  Through the SAP implementation, Coca-Cola Enterprises Inc is working towards achievement of the following goals: (1) developing standard global processes; (2) increasing information capabilities; and (3) providing system flexibility.

When looking at the financial performance of Coca-Cola Enterprises, Inc, the company looks as though it has reached a point of operational maturity where it is consistently earning profits and paying high returns to its investors.  The Net Profit Margin stays high, as does the Return on Common Equity.  Coca-Cola Enterprises Inc maintains a Profit/Earnings Ratio around 20%, which is the general standard for the market.  This suggests that Coca-Cola has reached a point of stability in its operations.  Investors do not expect high future growth for the company, nor do they expect any sharp decreases.

Overall, Coca-Cola Enterprises, Inc is a good investment choice for the investor desiring a steady rate of return and low risk.  The company has become very stable and is a world recognized brand.  It will also be buffeted by the winds of change, but the company has maintained strong financial performance.  It is not a high growth stock, so the investor looking for a quick return or a quick gain should not invest in Coca-Cola Enterprises, Inc.  However, for the more risk-adverse, long term investor, this stock can add value to the portfolio.  In the current financial statistics, there are no indications for trouble in the future for Coca-Cola Enterprises, Inc.  With the changes in internal structure and infrastructure development within Coca-Cola Enterprises, it is well poised to remain a steady player in the World Beverage Industry.

Current Ratio

Current Ratio (in millions)
  2005 2004 2003
Current Assets 10,250 12,281 8,396
Current Liabilities 9,836 11,133 7,886
Current Ratio 1.04 1.10 1.06

As can been seen from the graph above, Coca-Cola Enterprises, Inc has enough assets which can be converted to cash to cover its short-term liabilities.  However, they do not have substantial reserves or excess to cover short-term obligations.  Generally, companies with a figure of 1.25 are considered to be in good shape for repayment of short term liabilities.  In the case of Coca-Cola Enterprises, Inc, if they experience an inability to collect accounts receivable, or the need for quick cash flow, they may be in trouble.  Overall, however, this single indicator is not a main predictor of the company’s financial strength.

Total Asset Turnover

Total  Asset Turnover (in millions)
  2005 2004 2003
Net Sales 4,872 4,847 4,347
Total Assets 29,427 31,441 27,342
Total Asset Turnover 0.17 0.15 0.16

The Asset Turnover Ratio depicts how well the company is able to use its assets to generate sales.  Generally, companies with low profit margins on their products have a high Asset Turnover Ratio, whereas companies that have higher profit margins have lower Asset Turnover Ratios.

Coca-Cola Enterprises, Inc has remained fairly steady around .16 over the past 3 years.  This is a high asset ratio turnover.  It means that the company requires the use of large assets to generate its sales.  In the case of Coca-Cola  Enterprises, Inc, the company makes items with low margins and relies on selling large quantities for profit.

Debt to Asset Ratio

Debt Ratio (in millions)
  2005 2004 2003
Total Liabilities 13,072 15,506 13,252
Total Assets 29,427 31,441 27,342
Debt Ratio 0.44 0.49 0.48

In 2005, the Debt/Asset Ratio fell for Coca-Cola Enterprises, Inc.  The Debt/Asset Ratio corresponds to the Debt/Equity Ratio for Coca-Cola.  What this figure shows is that Coca-Cola’s generation of assets is financed by both debt and equity.  Debt finances about 44 percent of asset generation.  The invisible aspect of this ratio is the generation of income from equity.  In the case of Coca-Cola, approximately 46% of financing comes from equity generation.  This type of debt is subject to inflation rate changes.  If the company was heavily financed via debt, then creditors could worry about the company’s ability to repay its debts. Coca-Cola Enterprises would also need to be more concerned with interest rate changes.

Debt to Equity Ratio

Debt to Equity Ratio (in millions)
  2005 2004 2003
Long Term Debt 1,154 1,157 2,517
Stockholders Equity 16,355 15,935 14,090
Debt to Equity Ratio 7.06 7.26 17.86

For Coca-Cola Enterprises, Inc, we are using only the amount of long-term debt, ignoring current liabilities.  This figure shows how Coca-Cola Enterprises is financing its future growth.  It has relied heavily on stock for financing of projects.  Since 2003, Coca-Cola has been actively engaged in reducing the amount of debt financed through equity.  This places the company in a much better position to maintain working financing and reduce pressures for stock offerings.  If the company maintained a high financing rate via equity financing, the pressures for dilution on the company could be extreme.  The company is still exposed to a large amount of funding from equity and is subject to changes in the market.

Gross Profit Margin

Gross Profit Margin (in millions)
  2005 2004 2003
Gross Profit 14,909 14,068 13,081
Sales 23,104 21,742 20,857
Gross Profit Margin 0.65 0.65 0.63

The Gross Profit Margin is the amount of sales minus the cost of goods sold.  Therefore, this figure shows the amount of mark-up on the product above basic costs.  Of course, this does not include SG&A expenses.  In the case of Coca-Cola, they are achieving very high gross profit margins.  This means the selling price of the products has been remained at about the same level above the cost of materials.  Coca-Cola Enterprises has been able to around a 65% price markup.  This is a very good Gross Profit Margin, over 100% of the cost of materials.

 Net Profit Margin

 Net Profit Margin (in millions)
  2005 2004 2003
Earnings for Common Stockholders 4,872 4,847 4,347
Sales 23,104 21,742 20,857
Net Profit Margin 0.21 0.22 0.21

The Net Profit Margin takes into account the administrative and operating expenses.  Basically, what Coca-Cola Enterprises, Inc’s Net Profit Margin indicates is that for each dollar earned through sales, 21 cents goes directly to the bottom line of Coca-Cola’s profits.  This is a very high rate, and gives investors greater confidence because it depicts profits capable of returning dividends on earnings.  A rate of 21% is a comfortable profit margin.  When contrasted with the Gross Profit Margin, it can be seen that 44% of Coca-Cola Enterprise’s costs come from areas other than cost of goods sold.

Return on Total Assets

Return on Total Assets (in millions)
  2005 2004 2003
Earnings for Common Stockholders 4,872 4,847 4,347
Assets 29,427 31,441 27,342
Return on Total Assets 0.17 0.15 0.16

When deciding to pursue a new project, Coca-Cola Enterprises would look at its Return on Assets and the return of the project.  It is essential for the project to return at least the rate the Return on Assets is returning.  Otherwise, the company would be loosing revenue by taking on the projects.  Coca-Cola’s rate of 17% is a very high rate of return.  This means that assets are being well utilized to create income.  These assets figures include both the debt financing Coca-Cola uses, as well as the equity financing.

 Return on Common Equity

Return on Common Equity
  2005 2004 2003
Earnings for Common Stock Holders 4,872 4,847 4,347
Common Stock Equity 16,355 15,935 14,090
Return on Common Equity 0.30 0.30 0.31

Coca-Cola Enterprise’s Return on Common Equity is very high.  This is a very good indicator for investors.  Basically, for every dollar of net profit, 30% is returned to investors.  This is a very high rate of return.  Since Coca-Cola Enterprises Inc is primarily funded through common stock ownership, this rate of return encourages a high stock price and a loyal following of investors.  The Return on Common Equity should really be looked at over a longer period of time to get a better idea of the ability of the company to return on the equity investment.

 Price Earnings Ratio

Price Earnings Ratio (P/E)
  2005 2004 2003
Market Price per Share of Common Stock 40.31 41.64 50.75
Earnings per Share of Common Stock 2.04 2.00 1.77
Price Earnings Ratio (P/E) 19.76 20.82 28.67

The Price Earnings Ratio or P/E Ratio is one of the most highly used values for predicting the future performance of the company.  For the overall market, the P/E Ratio hovers around 20.  As can be seen in the case of Coca-Cola Enterprises, Inc, the P/E Ratio was higher in 2003 than it is in 2005.  However, this does not mean that Coca-Cola is in a bad condition now.  It is really an indicator that Coca-Cola stock prices are priced around what they are worth.  Most investors do not see high growth in the future for Coca-Cola, nor do they see a decline in growth.  Coca-Cola is also given an average rating of 2.75 for investors, with 5 being a strong investment opportunity, and 1 a weak opportunity.  This number is closely tied to the fact that Coca-Cola’s P/E Ratio hovers around the market standard.

Market to Book Value Ratio

Market Book Ratio
  2005 2004 2003
Market Value per Share of Common Stock 40.31 41.64 50.75
Book Value per share of Common Stock 6.83 6.56 5.72
Market Book Ratio 5.90 6.35 8.87

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The book value of a stock is what it is worth in the accounting system.  It deals with costs and retained earnings.  Market value, on the other hand, is what the investment company sees the value of the stock at.  If the market value of the stock was less than the book value of the stock (resulting in a negative Market Book Ratio), then the stock would be currently undervalued and a good buy.  The market value of the stock takes into account the potential for future growth of the stock.  Therefore, if the stock is earning over 6% on the book value, and the cost matches, then it could be a good buy.

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