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WALL STREET, CALIFORNIA | STOCK EXCHANGE/JAMES PELTZ
and MICHAEL HILTZIK

Fizz or Fizzle With Coke? How Strong Is Schwab 'Hockey Stick'?

April 27, 1999|JAMES PELTZ and MICHAEL HILTZIK

Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Coca-Cola (KO)

Mike: Say, Jim, I'm sitting here with a can of Coke that seems to have gone just a little bit flat. What could account for that?

Jim: Your symbolism is a reach, but you're right: Everything at Coke is flat these days. This used to be a stock you bought and then forgot about, a classic blue-chip growth stock, a gold-card member of the Dow Jones industrial average. No less than Warren Buffett owns a big position in Coke, which tells you something.

Mike: This is a stock that's so important to our sense of the market that, earlier this year, there was speculation that Coke waited to release a poor earnings report till after the market closed so as not to prevent the Dow from closing above 10,000 for the first time.

Jim: Under the late Robert Goizueta, who took over in 1981, Coke was virtually a license to coin money, and its market value skyrocketed from $5 billion to $145 billion. Then, after he died in 1997, Doug Ivester took the reins.

Mike: Goizueta was always viewed as one of those CEOs who could never be overpaid--somewhat like Disney's Michael Eisner a year or two ago.

Jim: But, now, Mike, Coca-Cola is suddenly not "it" anymore. What went wrong?

Mike: Let's think geographically. Coke gets something like two-thirds of its revenue and three-quarters of its profit in foreign markets, but guess what? Asia has been bad. Latin America has been bad. Europe has been not so great . . . . You get the picture.

Jim: Worse yet, Coke's North American business, which was expected to offset all of that, has gone flat too--to everyone's surprise.

Mike: Supposedly because Coke decided, in the last six months or so, in effect to raise prices.

Jim: I can't blame the folks in Atlanta. You go to the supermarket, and Coke and Pepsi are selling 12-packs of soda for around $2 and change, no matter what time of year it is.

Mike: So you just buy whichever one's on sale.

Jim: But what's really unnerved investors is that, over the last year or more, everyone kept expecting Coke to start showing its old form, only to have Coke keep announcing disappointing results.

Mike: So people have stopped giving Ivester & Co. the benefit of the doubt.

Jim: You can see it in the stock. It's selling in the mid-60s, so it's down 13% over the last 12 months. But get this: In the last two years, Coke is up only 3% vs. a 60% gain in the Standard & Poor's 500.

Mike: You know what? I have some words for investors who are worried about Coke.

Jim: We're waiting . . .

Mike: The words are: Are you nuts? Think of all the highflying stocks that have no business selling for what they are, and here's this crown jewel selling for about 40 times next year's earnings.

Jim: Now Coke's a stock you buy because it's undervalued, right?

Mike: Look at all their markets--do you see one that is still weakening? Is Asia weakening further?

Jim: No.

Mike: Is Europe weakening? No. Latin America? No, stabilizing. And I trust Coke to get its act together in North America and to execute its strategy of keeping prices steady here. So what's the problem?

Jim: We're in total agreement. I would buy this stock in a heartbeat. Look, a key reason Coke is temporarily suffering overseas is that it's made a huge investment in new plants in other countries, even Russia.

Mike: Right, and to me that's the model of how American corporate investment should be overseas--invest when things are bad. They know that when Russia is on its backside, it's exactly the time to put money in there. They don't change their game plan because they've been thrown for a couple of losses, and they're not counting on every dollar of investment producing $1.10 in net income in the next quarter.

Jim: Exactly. But when those countries do come back, Coke will be sitting pretty.

Mike: They'll end up with a monster market share and additional profits.

Jim: I'm also not worried about Coke at home. It's got those tremendous resources to pour into marketing to help make the price hikes stick. And even if prices stay low, those same resources help Coke fight a price war. Don't forget: This is a company that sells sugared water, nothing more, and yet it has $19 billion in annual sales. Coke knows how to weather its slumps and come back even better.

Charles Schwab (SCH)

Jim: I'll tell you flat out, Mike, that I like Schwab--the company, the stock and the man.

Mike: You've interviewed him, haven't you?

Jim: I've had the pleasure of spending time with him, and he's quite a story. He's always been very shy, has suffered dyslexia all of his life, and he has these boy-next-door looks that have been an enormous asset to his company over the years. His advertisers learned early on that Schwab's face translated into trustworthiness--people look at him and are willing to trust their savings with his firm. That's why, even today, it's no accident that Schwab's commercials have his face nearly filling the TV screen.

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