Coca-Cola (KO) 52 1/2 -1 1/4: Well, if you want examples of just how zany the market is getting, look no further than today's comments on Coca-Cola by JP Morgan analyst John Faucher. First, JP Morgan has a Long-Term Buy rating on the stock, which they choose when coverage was initiated two years ago, on September 25, 1997, and haven't changed. KO was trading at $62 a share at the time. Not really a bad call, since the stock peaked at $88 15/16 on July 15, 1998, a 40% return in 10 months. But KO has just been dropping ever since. With today's comments on the stock, JP Morgan makes essentially the following point: FY 2000 earnings estimates, based on guidance from Coca-Cola, are too high, the current multiple on the "too-high" estimates is also too high, and therefore the stock is very pricey. But they keep the rating at Long-Term Buy. It is about as negative a report as you can ever find on a stock, yet the rating doesn't change. But that isn't the "zany" thing that needs to be pointed out. (In fact, if they had issued a "Sell" rating, that would have been unusual.) No, the really zany thing is something that the JP Morgan analysts point out about the market. Going all the way back to the original 1997 analysis, JP Morgan shows that Coca-Cola's 12-month forward projected earnings estimates have steadily declined by -14%. Yet the Price/Earnings forward ratio on those projections has actually increased from 33 to 38, even though the stock price declined. In other words, Coca-Cola as a business is now projected to do worse in the future, than it was two years ago, but the stock has become more expensive, on a Price/Earnings basis. If you are saying Huh? you aren't alone. A higher multiple is supposed to imply a brighter future, not a dimmer future. That's why stocks fall so much when forward earnings projections are dropped. Both the multiple, and the earnings on which the multiple is based, usually drop. But not for Coke. JP Morgan finds it unusual. Briefing.com finds it unusual. But the market doesn't find it too unusual. Today's drop really isn't that big, at just around 2% off. That's bringing the forward P/E down a little to about 35. If Coca-Cola wants to get a higher multiple for their stock, maybe they ought to guide earnings estimates a little lower. After all, it worked in the past. - RVG
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