2012 2013 2014(E) 2015(E) Cash And Equivalents 8,442 10,414 10,504 10,602
Total Debt 32,610 37,079 37,079 37,079
Interest Expense 397 463 493 493
EBITDA 12,761 12,205 12,446 13,528
Debt to Book Capital 0.5 0.5 0.5 0.5
Quick Ratio 1.0 1.0 1.0 1.0
Debt to EBITDA 2.6 3.0 3.0 2.7
EBITDA to Interest Expense 32.1 26.4 25.3 27.5
2012 2013 2014(E) 2015(E)
Sales 48,017 46,854 46,861 49,423
% Change 3.2 -2.4 0.0 5.5
EBIT 10,779 10,228 10,469 11,443
% Net Sales 22.5 21.8 22.3 23.2
Net Income 9,214 9,379 9,326 9,939
% Net Sales 19.2 20.0 19.9 20.1
Free Cash Flow 8,096 7,972 8,383 8,984
% Net Sales 16.9 17.0 17.9 18.2
Prior Year Prior Quarter Current
Market Equity 179.88 Bil 181.85 Bil 169.79 Bil
Preferred — — —
Debt 35.12 Bil 37.08 Bil 38.44 Bil
Global distribution network bolsters Coke's wide moat.
Dave Sekera, CFA david.sekera@morningstar.com
Credit Analysis as of 21 May 2014 Business Analysis as of 21 May 2014 Estimates as of 21 May 2014
Credit Perspective 29 Apr 2014
Coca-Cola has earned its wide economic moat by building a massive global distribution network and significant brand strength. The combination of the wide moat with a strong balance sheet forms the basis of our AA- issuer credit rating.
Although consumer tastes may shift over time, as long as Coke remains focused on the demands of the consumer, we expect its distribution network will preserve Coke's position as the leading global beverage supplier and maintain its solid return on invested capital. In order to mitigate the risk in shifts away from carbonated products in mature markets to still beverages such as juices, ready-to-drink teas and coffees, and enhanced water, Coke has aggressively pursued growth in emerging beverage categories. Based on the continued volume and value share gains in the company's first-quarter results, with stronger gains in the latter, we think this indicates that pricing power remains solid. Moreover, recent marketing efforts seem to be taking hold in developing and emerging markets, which enjoyed 3% volume growth from a year ago.
We forecast Coke will generate about $47 billion in sales and about $13.9 billion in EBITDA in 2014 with resulting interest coverage of 29 times and debt leverage of 2.3 times.
While debt leverage is high for the rating, we expect it will decline steadily over our forecast period as the firm’s EBITDA expands and repays debt. Forecast debt leverage will gradually decline to 2 times in 2018. In the near term, we expect emerging markets to continue to drive the firm's top-line growth and operating margins to be pressured by higher marketing spending and investments in the bottling operations. We expect the firm's dividend payout ratio will remain at about 50%, leading to a mid-single-digit increase per annum, in line with our earnings growth forecasts.
Coca-Cola is the world's largest nonalcoholic beverage company. The firm, which sells a variety of sparkling and still beverages, generates nearly 60%
of its revenue and about 80% of its operating profit from outside the United States. Coke's core brands include Coca-Cola, Sprite, Dasani, Powerade, and Minute Maid. After the asset swap with Coca-Cola Enterprises, Coke now owns about 80% of its distribution in North America.
Issuer Profile
Credit Metrics (USD Mil)
Operating Summary (USD Mil)
Capital Structure
Source: Morningstar Committee members voting on rating do
not own securities issued by the company.
Currency amounts expressed with “$” are in U.S. dollars (USD) unless otherwise denoted.
Contents
Summary Credit Analysis Business Analysis Analyst Notes
Morningstar Analyst Forecasts Comparable Company Analysis Methodology
1 2 4 6 8 11 12
2014(E) 2015(E) 2016(E) 2017(E) 2018(E) Cash and Equivalents (beginning of period) 10,414 10,504 10,602 10,707 10,819
Adjusted Available Cash Flow 3,064 3,353 3,643 3,887 4,115
Total Cash Available before Debt Service 13,478 13,857 14,245 14,594 14,934
Principal Payments -18,949 -2,573 -2,681 -1,394 -3,298
Interest Payments -493 -493 -493 -493 -493
Other Cash Obligations and Commitments -175 — — — —
Total Cash Obligations and Commitments -19,617 -3,066 -3,174 -1,887 -3,791
USD Millions
% of Commitments
Beginning Cash Balance 10,414 33.0
Sum of 5-Year Adjusted Free Cash Flow 18,063 57.3
Sum of Cash and 5-Year Cash Generation 28,477 90.3
Revolver Availability — —
Asset Adjusted Borrowings (Repayment) — —
Sum of Cash, 5-Year Cash Generation, Revolver and Adjustments 28,477 90.3
Sum of 5-Year Cash Commitments -31,533 —
KO Sector Universe
Business Risk 2 4.4 5.1
Cash Flow Cushion 7 6.7 6.1
Solvency Score 3 4.8 4.8
Distance to Default 2 3.1 3.9
Credit Rating AA- A- BBB+
Five Year Adjusted Cash Flow Forecast (USD Mil)
Credit Analysis
Cumulative Annual Cash Flow Cushion
Cash Flow Cushion Possible Liquidity Need
Adjusted Cash Flow Summary
Credit Rating Pillars Peer Group Comparison
Source: Morningstar Estimates
Note: Scoring is on a scale 1-10, 1 being Best, 10 being Worst
Financial Health & Capital Structure
Coca-Cola is financially healthy. Although the acquisition of CCE's North American bottling business substantially increased the firm's debt, interest expense, and pension expense, we believe the company's strong cash flows will enable it to meet all of its financial obligations, invest for future growth, and increase its dividend in line with earnings growth (roughly 7% to 8% annually). Over the next five years, we expect EBITDA to cover interest expense more than 30 times, on average, and the firm to generate returns on invested capital in excess of 20%. We currently assign Coke an issuer rating of AA-, implying very low default risk.
As of the end of 2013, Coke carried $37 billion in debt versus just $12 billion at the end of 2009. The firm's pension and post-retirement plans are underfunded by around $1 billion.
Given Coke's solid financial health and strong cash flows, the company could choose to increase its leverage in order to consummate acquisitions or repurchase shares. However, we expect prospective acquisitions to be of small but growing companies in niche markets rather than transformational megadeals, so we do not anticipate a material change to Coke's capital structure in the near future. As an example, the firm spent about $1.5 billion in early 2014 to acquire a 12% stake in Keurig Green Mountain (with an option to take its position to 16%), a part of a partnership for at-home, single-serve, pod-based cold beverages bearing the Coca-Cola name.
Enterprise Risk
Coke and other carbonated soft drink manufacturers have seen declining volumes over the past decade in developed markets as consumers have shifted their preferences toward juice, water, and other noncarbonated beverages.
Although the company has enjoyed solid pricing power that has mostly offset these declines, 2013 saw industry volumes fall more than average price increases; a continued trend in
Credit Analysis
this direction is a critical risk. Similarly, Mexico recently instituted a tax on sugary drinks that has harmed volumes, and similar government actions in other markets could move consumers further away from Coca-Cola’s core carbonated beverages. Volatility in commodity prices, particularly for raw materials such as corn, juices, aluminum, and plastic resins, could also pinch Coke’s sales and profitability. The firm’s plans to divest its North American distribution arm also presents an execution risk. Finally, there is potential for at-home single-serve to take share from traditional bottles and cans of carbonated beverages; Coke has partnered with Keurig Green Mountain on a potential solution, but continued development in this arena could create volatility in the end market.
Business Analysis
Investment Thesis
We believe Coca-Cola’s brand-driven intangible assets and strong cost advantages as the largest beverage company in the world support its wide economic moat and long-term growth trajectory. The company has outlined ambitious targets in its 2020 vision, including growing volume at a 3%
to 4% clip, revenue gains in the midsingle digits, and operating income expansion of 6% to 8%. Emerging- and developing-market gains drive the bulk of the top-line performance; while declining consumption of carbonated beverages in North America is a near-term headwind for Coke, we believe international markets will provide plenty of growth opportunities in the long term given lower per capita consumption levels. In addition, Coke’s dominant market position in many regions should support continued strong pricing actions.
Coke’s noncarbonated beverage portfolio also provides a key growth avenue. Volume from these products climbed to about 26% of the company’s total from 20% in 2007, and we expect continued positive gains as consumers shift their preference toward juices and other still beverages.
Although PepsiCo holds the leading domestic market share with brands like Gatorade and Tropicana, Coke has carved its own niches in both the U.S. and internationally with products such as Simply Orange juice, Vitaminwater, and Minute Maid Pulpy (Coke’s first billion-dollar brand to emerge from China). As these brands gain traction, we forecast price increases and improved profitability.
In the near term, Coke plans to shed its North American distribution assets. The firm had purchased these businesses in 2010 as part of an acquisition of its U.S.
bottlers, in an effort to streamline operations and develop nimbler product differentiation strategies. While we believe the company has enjoyed synergies from this purchase, we anticipate improved profitability and returns on invested capital after the divestitures given the low-margin,
asset-intensive nature of bottling operations. That said, we believe Coke’s ability to market new products, increase prices, and support its overall brands will ultimately drive returns on invested capital north of 20% over the next several years.
Economic Moat
In our view, Coca-Cola has carved a wide economic moat, stemming from the company’s iconic brand image, its strong distribution network, and economies of scale as the world’s leading beverage manufacturer. Carbonated soft drink makers will probably continue to face secular volume headwinds in developed markets given rising health concerns and a growing preference for still beverages such as juice, coffee, and tea, but we expect Coke and its primary competitor—PepsiCo—to remain relatively disciplined on price actions. We believe barriers to entry stemming from the company’s sizable bottling and distribution network, its premier relationships with major retailers, and strong brand awareness will continue to support low-single-digit price increases and bar major share gains from private-label competitors. In addition, Coca-Cola’s noncarbonated portfolio—which includes Powerade, Minute Maid, and Vitaminwater—should enable the company to drive volume gains in a growing end market; over the past three years, we calculate that these still beverages have seen volume grow at an average 6% clip, versus just 3% for sparkling drinks.
Coke also enjoys a dominant position in many emerging markets, and its direct-to-store distribution model places it at a competitive advantage to other vendors who rely on third-party distributors. Given its market position, the company is typically able to price higher, on average, than Pepsi in these regions, and we believe this is likely sustainable. The firm’s at-home partnership with Keurig Green Mountain could also build upon Coke’s brand image and drive similarly premium pricing (though probably won’t
Business Analysis
be a material cash-flow driver in the near term). In all, returns on invested capital have averaged an impressive 20% over the past four years, and we expect continued economic profit generation going forward.
Moat Trend
We view Coca-Cola’s moat trend as stable. The company has held global market share in its core carbonated beverage offerings for some time and operates in a largely rational duopoly with rival PepsiCo. Although recent carbonated soft drink declines will probably continue in developed markets, growth opportunities in emerging areas, where per capita consumption is markedly lower (just 44 8-ounce servings of carbonated soft drinks per person in 2012 versus more than 700 in the U.S., according to Beverage Digest, for instance) should lead to low- to mid-single-digit beverage volume gains over the long run. Although we caution that the near-term shift toward emerging-market and still-beverage growth offers a negative margin mix, we expect productivity improvements, positive pricing, and economies of scale to drive improving profitability over the long run.
Stewardship
We believe Coca-Cola’s stewardship is strong, and we assign the firm an Exemplary management rating. CEO Muhtar Kent has led the company since 2009, and we appreciate his focus on the long-term goals set up in Coke’s 2020 Vision. We’re also encouraged that the firm has remained a shrewd repurchaser of its own shares, and that Coke surpassed its original planned synergies outlined as part of the CCE North American bottler acquisition in 2010.
In early 2014, Coca-Cola faced investor criticism surrounding the potential dilutive effects of its recently approved management incentive plan, but we believe these claims largely ignore offsetting factors such as proceeds garnered from options transactions, performance standards that still need to be met, and the company's sizable
repurchase program. Admittedly, dilution under the new plan may still be slightly higher, but it improves the ownership mentality of more than 6,000 Coke employees, easing our qualms about the mathematics of the equation.
Recent Notes from our Credit and Equity Analysts
Coke Enjoys Still Beverage and Emerging-Market Growth in 1Q; Maintaining Our $44 Fair Value Estimate 15 Apr 2014
We plan to maintain our $44 fair value estimate for wide-moat Coca-Cola following the company's first-quarter results. Continued volume and value share gains, with stronger gains in the latter, indicate that pricing power remains solid. Moreover, recent marketing efforts seem to be taking hold in developing and emerging markets, which enjoyed 3% volume growth from a year ago. China saw total beverage volume jump 12%, while Brazilian volume ticked up 4%--both sequentially improved. In all, revenue fell 4%
year over year, though the entirety of this decline stemmed from negative currency headwinds, which is not surprising given management's prior comments on the issue.
However, sparkling case volume declined about 1% year over year. Still drink volume increased 8%, reflecting continued success in nonsoda products, but sparkling beverages represented a larger 74% of total cases in 2013.
Management attributed the weakness to a shift in the Easter holiday this year and price discipline in Great Britain at the expense of volume, given new packaging; the company expects the absence of these issues and stepped-up marketing to drive volume growth in line with long-term targets in the low single digits for the full year. Such advertising activities will probably erode the selling, general, and administrative expense leverage enjoyed in the first quarter.
We plan to maintain our Exemplary Stewardship Rating for Coke, as we believe recent investor criticism surrounding the potential dilutive effects of the proposed management incentive plan largely ignores offsetting factors such as proceeds garnered from options transactions, performance standards that still need to be met, and the company's sizable repurchase program. Admittedly, dilution under the new plan may still be slightly higher, but it improves the
ownership mentality of more than 6,000 Coke employees, easing our qualms about the mathematics of the equation.
Near-Term Challenges Do Not Diminish Coca-Cola's Long-Term Opportunities 18 Feb 2014
While Coca-Cola's fourth-quarter volume growth moderated to just 1%, 7 percentage points of adverse exchange rates will have a negative impact on the firm's 2014 operating profit. Management remains committed to Coke's 2020 vision and its long-term growth algorithm (which includes high-single-digit growth in constant currency EPS). Even though Coke's 2013 volume growth was tepid--partly the result of emerging-market headwinds--we believe the firm's economic moat remains wide with a strong brand portfolio that commands pricing power.
Longer-term, we believe that Coca-Cola will benefit from rising per capita emerging-market consumption across its entire beverage portfolio, as government-led wage rate increases and infrastructure investments, a flight to urban centers, and younger populations are all conducive to favorable emerging-market disposal income trends. This should help drive volume growth of 3% to 4%, and sales growth of 5% to 6%.
This Friday, Coca-Cola management will present at the Consumer Analyst Group of New York, or CAGNY, conference in Florida. They will be discussing the firm's long-term growth opportunities in more detail. As such, we will wait to update our valuation model or change our $45 fair value estimate. However, given the near-term currency headwinds, new soda taxes in Mexico, and declining diet soda consumption in the United States, we may end up slightly reducing our fair value estimate.
For the year, comparable constant currency revenue grew 3%, and constant currency operating profit climbed 6%.
Adjusted EPS was $2.08, an increase of 8%. Going forward,
Recent Notes from our Credit and Equity Analysts
Coca-Cola plans to achieve $1 billion of cost savings by 2016 (primarily in supply chain and IT functions). The firm will reinvest these cost savings into increased media investments. In our opinion, this is a prudent use of capital because much of Coca-Cola's wide economic moat is centered on its power brands.
Coca-Cola and GMCR Enter Into a Long-Term Partnership; Great Deal for GMCR, Good Deal for Coke 05 Feb 2014
Coca-Cola and Green Mountain Coffee Roasters have entered into a 10-year collaboration deal that will introduce Coca-Cola brands for use in GMCR's soon-to-be released Keurig Cold at-home beverage system. The system and Coke pods will be sold around the world. In connection with this agreement, GMCR will issue Coke 16.7 million newly issued shares at $74.98 per share, representing 10% of GMCR.
Coca-Cola's equity investment will total $1.25 billion, and given the surge in GMCR's stock price following the announcement, Coca-Cola has already garnered more than
$800 million of paper profits. We believe that by entering this new premium channel, the Coca-Cola brand will continue to be viewed as the leading global soft drink brand, and we consequently maintain our wide moat rating and
$45 fair value estimate.
GMCR will be Coca-Cola’s exclusive partner for the production and sale of Coca-Cola branded single-serve, pod-based, cold beverages. We expect that the Coca-Cola pods will be available during 2015, and as such are not yet incorporating the associated equity income of GMCR in our Coca-Cola valuation model. Green Mountain will be able to sign on other cold beverage brands, and we suspect that it is actively courting Pepsi, Dr Pepper, Red Bull, and Monster to join the ecosystem.
We believe that Soda Stream is viable benchmark for sizing
the at-home soda market. Currently, Soda Stream has 6.5 million active households, 1.3 million of which are in the United States. This equates to a penetration rate of around 1%. We believe that GMCR’s Keurig Cold system could approach this level of penetration by 2019. Given the convenience of the product, we expect the price per serving will be materially above the typical 2L or 24-pack consumers typically purchase for at-home consumption. Should this system reach 6.5 million households, and each household averages 2.5 people who drink 200 Coke pods per year (roughly one half of the average American’s annual Coke consumption), we estimate that the pod system could amount to slightly less than 1% of Coke’s global beverage volume. However, given that this will be a premium product it could eventually surpass 2% of Coke’s sales.
The K-Cup has proved to be a growth juggernaut in other categories (such as coffee); in the past 10 years, GMCR’s annual sales have grown from $137 million to more than
$4.3 billion. We suspect that Coca-Cola is drawn to this disruptive innovation and would rather be a part of it than fight it. Although we expect much of the Coca-Cola pod volume will be incremental, we do suspect some of the Coke pod sales will cannibalize traditional Coke SKUs.
Consequently, one potential risk to this venture is that Coca-Cola’s bottling partners may see this as channel conflict.
The Keurig Cold platform will be able to produce a variety of sodas, energy drinks, sports drinks, teas, enhanced waters, and juice drinks. GMCR estimates that the cold beverage category is roughly 7 times larger than the hot beverage category. We note, however, that GMCR will have to convince consumers to first purchase the machine and then to dedicate counter space to the device. As such, we believe that the majority of American households will continue to purchase their soda the traditional way.
2011 2012 2013 2014 2015
Revenue 46,542 48,017 46,854 46,861 49,423
Cost of Goods Sold 18,216 19,053 18,421 18,510 19,522
Gross Profit 28,326 28,964 28,433 28,351 29,901
Selling, General & Administrative Expenses 17,440 17,738 17,310 17,320 17,815
Other Operating Expense (Income) 732 447 895 562 642
Other Operating Expense (Income) — — — — —
Depreciation & Amortization (if reported separately) — — — — —
Operating Income (ex charges) 10,154 10,779 10,228 10,469 11,443
Restructuring & Other Cash Charges -529 -137 -576 -576 -576
Impairment Charges (if reported separately) — — — — —
Other Non-Cash (Income)/Charges — — — — —
Operating Income (incl charges) 10,683 10,916 10,804 11,045 12,019
Interest Expense 417 397 463 493 493
Interest Income 483 471 534 550 567
Pre-Tax Income 10,749 10,990 10,875 11,102 12,092
Income Tax Expense 2,805 2,723 2,851 2,553 2,902
Other After-Tax Cash Gains (Losses) — — — — —
Other After-Tax Non-Cash Gains (Losses) — — — — —
(Minority Interest) 628 752 560 777 749
(Preferred Dividends) — — — — —
Net Income 8,572 9,019 8,584 9,326 9,939
Weighted Average Diluted Shares Outstanding 4,646 4,584 4,509 4,448 4,381
Diluted Earnings Per Share 1.85 1.97 1.90 2.10 2.27
Adjusted Net Income 8,920 9,214 9,379 9,326 9,939
Diluted Earnings Per Share (Adjusted) 1.92 2.01 2.08 2.10 2.27
Dividends Per Common Share 0.93 1.00 1.10 1.22 1.32
EBITDA 12,637 12,898 12,781 13,022 14,104
Adjusted EBITDA 12,108 12,761 12,205 12,446 13,528
Morningstar Analyst Forecasts
Income Statement (USD Mil)
Fiscal Year Ends in December Forecast
2011 2012 2013 2014 2015
Cash and Equivalents 12,803 8,442 10,414 10,504 10,602
Investments 1,232 8,109 9,854 9,854 9,854
Accounts Receivable 4,920 4,759 4,873 4,874 5,140
Inventory 3,092 3,264 3,277 3,293 3,473
Deferred Tax Assets (Current) — — — — —
Other Short Term Assets 3,450 5,754 2,886 2,886 2,886
Current Assets 25,497 30,328 31,304 31,411 31,955
Net Property Plant, and Equipment 14,939 14,476 14,967 15,895 16,874
Goodwill 12,219 12,255 12,312 12,312 12,312
Other Intangibles 7,680 7,677 7,884 7,884 7,884
Deferred Tax Assets (Long-Term) — — — — —
Other Long-Term Operating Assets 12,406 12,222 13,195 13,195 13,195
Long-Term Non-Operating Assets 7,233 9,216 10,393 10,393 10,393
Total Assets 79,974 86,174 90,055 91,090 92,613
Accounts Payable 9,009 8,680 9,577 9,623 10,149
Short-Term Debt 14,912 17,874 17,925 17,925 17,925
Deferred Tax Liabilities (Current) 362 1,267 309 309 309
Other Short-Term Liabilities — — — — —
Current Liabilities 24,283 27,821 27,811 27,857 28,383
Long-Term Debt 13,656 14,736 19,154 19,154 19,154
Deferred Tax Liabilities (Long-Term) 4,694 4,981 6,152 6,152 6,152
Other Long-Term Operating Liabilities 5,420 5,468 3,498 3,498 3,498
Long-Term Non-Operating Liabilities — — — — —
Total Liabilities 48,053 53,006 56,615 56,661 57,187
Preferred Stock — — — — —
Common Stock 880 1,760 1,760 1,760 1,760
Additional Paid-in Capital 11,212 11,379 12,276 12,276 12,276
Retained Earnings (Deficit) 53,550 58,045 61,660 65,559 69,714
(Treasury Stock) -31,304 -35,009 -39,091 -42,002 -45,160
Other Equity -2,703 -3,385 -3,432 -3,432 -3,432
Shareholder's Equity 31,635 32,790 33,173 34,161 35,158
Minority Interest 286 378 267 267 267
Total Equity 31,921 33,168 33,440 34,428 35,425
Morningstar Analyst Forecasts
Balance Sheet (USD Mil)
Fiscal Year Ends in December Forecast
2011 2012 2013 2014 2015
Net Income 8,634 9,086 8,626 8,549 9,190
Depreciation 1,954 1,982 1,977 1,977 2,085
Amortization — — — — —
Stock-Based Compensation 354 259 227 227 234
Impairment of Goodwill — — — — —
Impairment of Other Intangibles — — — — —
Deferred Taxes 1,028 632 648 — —
Other Non-Cash Adjustments -334 192 197 — —
(Increase) Decrease in Accounts Receivable -1,893 -1,080 -932 -1 -266
(Increase) Decrease in Inventory — — — -16 -180
Change in Other Short-Term Assets — — — — —
Increase (Decrease) in Accounts Payable — — — 46 526
Change in Other Short-Term Liabilities -269 -426 -201 — —
Cash From Operations 9,474 10,645 10,542 10,783 11,589
(Capital Expenditures) -2,920 -2,780 -2,550 -2,905 -3,064
Net (Acquisitions), Asset Sales, and Disposals -314 797 630 — —
Net Sales (Purchases) of Investments 803 -9,234 -1,991 — —
Other Investing Cash Flows -93 -187 -303 — —
Cash From Investing -2,524 -11,404 -4,214 -2,905 -3,064
Common Stock Issuance (or Repurchase) -2,944 -3,070 -3,504 -2,911 -3,159
Common Stock (Dividends) -4,300 -4,595 -4,969 -5,427 -5,784
Short-Term Debt Issuance (or Retirement) — — — — —
Long-Term Debt Issuance (or Retirement) 4,965 4,218 4,711 — —
Other Financing Cash Flows 45 100 17 550 515
Cash From Financing -2,234 -3,347 -3,745 -7,787 -8,427
Exchange Rates, Discontinued Ops, etc. (net) -430 -255 -611 — —
Net Change in Cash 4,286 -4,361 1,972 90 98
Morningstar Analyst Forecasts
Cash Flow (USD Mil)
Fiscal Year Ends in December Forecast
Company/Ticker Net Income
(Mil) 2013 2014(E) 2015(E) 2013 2014(E) 2015(E) 2013 2014(E) 2015(E) 2013 2014(E) 2015(E) 2013 2014(E) 2015(E)
Nestle SA NSRGY USA 10,015 CHF 47.9 48.5 48.6 17.6 19.1 19.2 14.2 15.8 16.0 10.8 12.1 12.1 12.9 9.9 9.9
PepsiCo Inc PEP USA 6,864 USD 53.0 52.7 52.7 18.6 19.0 19.8 14.6 14.9 15.7 10.3 10.1 10.3 10.4 10.3 10.8
Monster Beverage Corp MNST USA 336 USD 52.2 52.4 52.4 26.4 28.0 27.9 25.5 26.9 26.7 15.0 16.8 16.8 10.7 14.3 14.5
Dr Pepper Snapple Group Inc DPS USA 614 USD 58.3 58.0 58.0 21.3 22.8 22.5 17.4 18.7 18.4 10.2 11.0 10.8 11.5 12.8 12.2
Average 52.9 52.9 52.9 21.0 22.2 22.4 17.9 19.1 19.2 11.6 12.5 12.5 11.4 11.8 11.9
Coca-Cola Co KO US 9,379 USD 60.7 60.5 60.5 26.1 26.6 27.4 21.8 22.3 23.2 20.0 19.9 20.1 17.1 16.8 17.3
Company/Ticker Total Debt
(Mil) 2013 2014(E) 2015(E) 2013 2014(E) 2015(E) 2013 2014(E) 2015(E) 2013 2014(E) 2015(E) 2013 2014(E) 2015(E)
Nestle SA NSRGY USA 23,130 CHF 37.0 33.9 32.8 27.0 25.3 24.7 19.1 22.5 24.2 1.4 1.2 1.2 1.9 1.9 1.9
PepsiCo Inc PEP USA 29,639 USD 122.1 131.6 131.6 55.0 56.8 56.8 13.6 13.3 14.4 2.4 2.3 2.1 3.2 3.4 3.4
Monster Beverage Corp MNST USA — USD — — — — — — — — — — — — 1.4 1.3 1.3
Dr Pepper Snapple Group Inc DPS USA 2,574 USD 113.0 130.2 132.1 53.1 56.6 56.9 10.4 12.0 12.0 2.0 2.1 2.1 3.6 3.8 3.9
Average 90.7 98.6 98.8 45.0 46.2 46.1 14.4 15.9 16.9 1.9 1.9 1.8 2.5 2.6 2.6
Coca-Cola Co KO US 37,079 USD 111.8 108.5 105.5 52.8 52.1 51.3 26.4 25.3 27.5 3.0 3.0 2.7 2.7 2.7 2.6
Company/Ticker Market Cap
(Mil) 2013 2014(E) 2015(E) 2013 2014(E) 2015(E) 2013 2014(E) 2015(E) 2013 2014(E) 2015(E) 2013 2014(E) 2015(E)
Nestle SA NSRGY USA 249,593 USD 2.00 3.86 4.16 0.91 1.04 1.08 0.65 0.80 0.82 0.56 0.95 1.01 65.4 60.8 60.7
PepsiCo Inc PEP USA 136,475 USD 6.01 4.87 4.89 1.24 1.12 1.11 1.05 0.93 0.92 1.77 1.40 1.40 50.6 53.0 52.0
Monster Beverage Corp MNST USA 11,720 USD 1.22 3.25 3.37 3.74 4.84 4.85 3.04 4.09 4.05 — — — — — —
Dr Pepper Snapple Group Inc DPS USA 11,600 USD 0.75 2.65 2.83 1.09 1.08 1.09 0.89 0.94 0.94 2.32 1.29 1.33 48.4 50.1 51.0
Average 2.50 3.66 3.81 1.75 2.02 2.03 1.41 1.69 1.68 1.55 1.21 1.25 54.8 54.6 54.6
Coca-Cola Co KO US 185,609 USD 2.31 2.36 2.42 1.13 1.13 1.13 1.01 1.01 1.00 0.58 0.59 0.59 57.9 58.2 58.2
Comparable Company Analysis
These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Profitability Analysis
Leverage Analysis
Liquidity Analysis
Gross Margin % EBITDA Margin % Operating Margin % Net Margin % Free Cash Flow Margin %
Debt/Equity % Debt/Total Cap % EBITDA/Interest Exp. Total Debt/EBITDA Assets/Equity
Cash per Share Current Ratio Quick Ratio Cash/Short-Term Debt Payout Ratio %
Last Historical Year
Last Historical Year
coverage list.
3 Encapsulates our in-depth modeling and quantitative work in one letter grade.
3 Allows investors to rank companies by each of the four underlying com- ponents of our credit ratings, including both analyst-driven and quantitative measures.
3 Provides access to all the underlying forecasts that go into the rating, available through our insti- tutional service.
different lenses—qualitative and quantitative, as well as fundamental and market-driven. We therefore evaluate each company in four broad categories.
Business Risk
Business Risk captures the fundamental uncertainty around a firm’s business operations and the cash flow generated by those operations. Key components of the Business Risk rating include the Morningstar Economic Moat™ Rating and the Morningstar Uncertainty Rating.
Cash Flow Cushion™
Morningstar’s proprietary Cash Flow Cushion™ ratio is a fundamental indicator of a firm’s future financial health The measure reveals how many times a company’s internal cash generation plus total excess liquid cash will cover its debt-like contractual commitments over the next five years. The Cash Flow Cushion acts as a predictor of financial distress, bringing to light potential refinancing, operational, and liquidity risks inherent to the firm.
3 3 3 3 3
3
ability of a firm to satisfy its debt and debt-like obligations.
The higher the rating, the less likely we think the company is to default on these obligations.
The Morningstar Corporate Credit Rating builds on the modeling expertise of our securities research team. For each company, we publish:
Five years of detailed pro-forma financial statements Annual estimates of free cash flow
Annual forecasts of return on invested capital
Scenario analyses, including upside and downside cases Forecasts of leverage, coverage, and liquidity ratios for five years
Estimates of off balance sheet liabilities
These forecasts are key inputs into the Morningstar Corporate Credit Rating and are available to subscribers at select.morningstar.com.
Morningstar Research Methodology for Determining Corporate Credit Ratings
Competitive Analysis
Cash-Flow Forecasts
Scenario Analysis
Quantitative Checks
Rating Committee
A AA
BBB
C
D
BB CC B
CCC
Analyst conducts company and industry research:
• Management interviews
• Conference calls
• Trade show visits
• Competitor, supplier, distributor, and customer interviews
• Assign Economic Moat™ Rating
Analyst considers company financial statements and competitive dynamics to forecast future free cash flows to the firm.
Analyst derives estimate of Cash- Flow Cushion™.
Analysts run bull and bear cases through the model to derive alternate estimates of enterprise value.
Based on compet- itive analysis, cash-flow fore- casts, and scenario analysis, the analyst assigns Business Risk.
We gauge a firm’s health using quantitative tools supported by our own backtesting and academic research.
• Morningstar Solvency Score™
• Distance to Default
Senior personnel review each company to determine the appropriate final credit rating.
• Review modeling assumptions
• Approve company-specific adjustments
AAA Extremely Low Default Risk AA Very Low Default Risk
A Low Default Risk BBB Moderate Default Risk
BB Above Average Default Risk B High Default Risk
CCC Currently Very High Default Risk CC Currently Extreme Default Risk
C Imminent Payment Default D Payment Default UR Under Review UR+ Positive Credit Implication UR- Negative Credit Implication
AAA
inary credit rating. To determine the final credit rating, a credit committee of at least five senior research per- sonnel reviews each preliminary rating.
We review credit ratings on a regular basis and as events warrant. Any change in rating must be approved by the Credit Rating Committee.
Investor Access
Morningstar Corporate Credit Ratings are available on Morningstar.com. Our credit research, including detailed cash-flow models that contain all of the components of the Morningstar Corporate Credit Rating, is available to subscribers at select.morningstar.com.
measure focuses on the future cash-generating performance of the firm derived from Morningstar’s proprietary discounted cash flow model. By making standardized adjustments for certain expenses to reflect their debt-like characteristics, we can compare future projected free cash flows with debt-like cash commitments coming due in any particular year. The forward-looking nature of this metric allows us to anticipate changes in a firm’s financial health and pinpoint periods where cash shortfalls are likely to occur.
Morningstar Solvency Score™
The Morningstar Solvency Score™ is a quantitative score derived from both historical and forecasted financial ratios.
It includes ratios that focus on liquidity (a company’s ability to meet short term cash outflows), profitability (a company’s ability to generate profit per unit of input), capital structure (how does the company finance its operations), and interest coverage (how much of profit is used up by interest payments).
Distance to Default
Morningstar’s quantitative Distance to Default measure ranks companies on the likelihood that they will tumble into financial distress. The measure is a linear model of the percentile of a firm’s leverage (ratio of Enterprise Value to Market Value), the percentile of a firm’s equity volatility relative to the rest of the universe and the interaction of these two percentiles. This is a proxy methodology for the common definition of Distance to Default which relies on option-based pricing models. The proxy has the benefit of increased breadth of coverage, greater simplicity of calculation, and more predictive power.
For each of these four categories, we assign a score, which we then translate into a descriptive rating along the scale of Very Good / Good / Fair / Poor / Very Poor.
