Is The Coca-Cola Company (KO) Finally Cheap Enough to Buy?

Rarely does a wonderful business sell at an extremely cheap price and The Coca-Cola Company (NYSE:KO)‘s stock price does not represent an exception, but investors who make a long-term investment in the company at current prices will likely earn market-beating returns over the course of several years.

Does one thing really well

The Coca-Cola Company (NYSE:KO) sells carbonated soft drinks. It has done so for its entire existence and likely will continue to do so for decades into the future. More importantly, it is the best company in the world at selling carbonated soft drinks and no other company is likely to match it any time soon.

The Coca-Cola Company (NYSE:KO) earns higher margins than its peers. Although it manages an enormous distribution network that is near impossible to duplicate unless you are PepsiCo, Inc. (NYSE:PEP), the company’s margin advantage comes from selling its products at a higher markup. The company’s superior brand equity allows it to charge more for Coke than PepsiCo, Inc. (NYSE:PEP) can charge for Pepsi. That’s a powerful advantage.

As a result of having the best brand in the business, The Coca-Cola Company (NYSE:KO) owns the top market share — it owns a steady 40% share of the carbonated soft drink market, whereas PepsiCo, Inc. (NYSE:PEP) has less than 30% share and Dr Pepper Snapple Group Inc. (NYSE:DPS) has a 15% share.

The market share of all three companies has remained remarkably stable over the last decade, an indication of each firm’s ability to protect its share from new entrants as well as each other. Perhaps the chief reason each company can protect its share is customer loyalty. A person typically drinks one of Coke, Pepsi, or Dr Pepper Snapple Group Inc. (NYSE:DPS), but rarely drinks all three with any regularity.

The market entrenchment that leads to stable market share enables these companies to earn above-average returns on invested capital (ROIC).

Although Dr. Pepper Snapple’s decade-average ROIC is unremarkable, the metric has significantly improved over the last several years as the company reached scale.

Although PepsiCo and Dr Pepper Snapple Group Inc. (NYSE:DPS) are arguably great companies in their own right, I prefer The Coca-Cola Company (NYSE:KO) because it is focused on only one thing it does better than anyone else: carbonated soft drinks.

Analysts are raving about PepsiCo’s snack division, which is the largest in the world. It is no doubt a valuable asset — and one that Coca-Cola wishes it had — but it does not pose any threat to Coca-Cola in the carbonated soft drink business. In fact, as PepsiCo focuses more attention and investment on its world-leading salty snack position, Coca-Cola will be in better position in the carbonated soft drink market.