Archive for Sunday, March 20, 2005

The Motley Fool

March 20, 2005


Last week's question

My roots go back to 1865, when Fredrik Idestam, a Finnish mining engineer, established a wood-pulp mill in Southern Finland. I later morphed into a conglomerate involved in manufacturing things from paper to chemicals to rubber galoshes to televisions, before finally evolving in the last decade into a major mobile communications company. I'm a leading global supplier of colorful portable talking and listening devices. My slogan is "Connecting People." I employ more than 50,000 people, some 39 percent of them in research and development. I rake in about $30 billion in sales annually. Who am I?

(Answer: Nokia)

When to buy stocks

Is it smart to buy more shares of a stock when its price has fallen? -- D.A., Norwich, Conn.

This practice is called "averaging down." It's often regrettable, because there's frequently a good reason why a stock is dropping. There are some exceptions to this rule, though. For example, perhaps the entire market has swooned, taking your holding with it. Or maybe the market has significantly overreacted to your company's latest news, sending its shares down to levels you don't believe are justified. If so, you can snap up some bargain-priced shares. Before you average down on any stock, make sure you take the time to re-evaluate the business.

Coke's value

The CEO of Coca-Cola (NYSE: KO) announced the company's 2004 fourth-quarter and full-year results recently, adding: "We are not satisfied with our performance in 2004. By most measures, we did not perform to our potential or the expectations of our shareowners." Coke's poor 2004 performance led to an 18 percent decline in the stock last year.

The company sees 2004 as a transition year and says that growth will accelerate. Indeed, in the fourth quarter, net income advanced 30 percent. Although currency, lower taxes and other factors helped inflate that number, so did a 4.5 percent increase in operating margins. Coke likes its prospects so much that it purchased $1.7 billion of its own shares in 2004 and plans to spend at least $2 billion for repurchases in 2005.

Despite generating $5.1 billion in free cash flow in 2004, the company increased its total debt by $1.8 billion, to $7.2 billion. Fortunately, the firm is a cash cow, turning every dollar of sales into nearly a quarter of earnings, and sporting roughly as much cash as debt on the balance sheet.

It's been several months since the Motley Fool recommended Coke, and the stock has risen some 8 percent since then. At the time, Fool analyst Philip Durell pegged Coke's intrinsic value at $52 a share. That looks to be on target, leaving the stock still value-priced.

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