COCA COLA CO (KO) stock intrinsic value fair value estimate & owner earnings analysis

The Coca-Cola Company sells concentrates, syrups and finished drinks under brands such as Coca-Cola, Sprite, Fanta, Minute Maid, smartwater and fairlife. Most of the volume is bottled and distributed by independent partners such as Coca-Cola FEMSA. In 2025 the system sold 33.8 billion unit cases, up only 0.3% from 33.7 billion in 2024, and about 84% of volume is outside the United States (largest markets: Mexico, China, Brazil and India). So recent profit growth has come from pricing and mix, not from selling more cases. HOW WE MEASURE EARNINGS. We start from operating cash flow, remove swings in working capital, subtract stock-based pay (about $279 million in 2025) and deduct only the capital spending needed to keep the business running (about $2.07 billion of the $2.11 billion spent in 2025). Two very large items are removed as working capital because they are not recurring earnings: the $6.0 billion deposit paid to the IRS in September 2024 (recorded as an asset) and the $6.2 billion paid in March 2025 to settle the earn-out owed for the 2020 fairlife purchase (the non-cash accruals for that earn-out in earlier years were already added back). We checked that reported net income plus non-cash charges and the working-capital line add up to operating cash flow for 2023, 2024 and 2025. On this basis owner earnings per share were $1.82 (2020), $2.27 (2021), $2.29 (2022), $2.41 (2023), $2.49 (2024) and $2.84 (2025). To value the business separately from its lenders we add back cash interest ($1.7 billion in 2025), giving business cash flow per share of $2.44, $2.49, $2.74, $2.87 and $3.24 for 2021 through 2025. One thing we could not fully attribute: business cash flow rose about 12.8% in 2025 while revenue rose only 1.9%, so we did not lift our starting level to that single year. STARTING LEVEL. We use the median of 2021 to 2025, $2.74 per share (about $11.8 billion in total). 2020 is left out as pandemic-distorted (business cash flow per share slipped only about 1.5% that year), and years before 2018 describe a company still refranchising its bottling operations (2017 was also depressed by the one-time U.S. tax-reform transition tax). In the latest completed year business cash flow per share grew 12.8%; the base case assumes only 3% for year 1, so no reversal of a slowdown is needed. First-quarter 2026 revenue ($12.5 billion vs $11.1 billion) and net income ($3.9 billion vs $3.3 billion) were higher, but we do not move the level on one quarter. BASE CASE, $48.59 per share. Business cash flow grows 3% a year for five years and 2% for the next five, then stays flat. Growth credited: pricing and mix on brands that held up through 2020 and grew revenue about 5.5% a year from 2021 to 2025 (2.4% a year from 2023 to 2025). Left out: volume growth (volume is flat), new products, margin gains, the retained profits of bottlers Coca-Cola owns stakes in (carried at $20.2 billion; only dividends are in our numbers), and any refund from the IRS. After year 10 nothing new is assumed; the brands (indefinite-life trademarks carried at $12.5 billion; the Coca-Cola trademark alone is 47% of volume) simply keep earning. The business is worth $55.74 per share (about $240 billion), it owes net $7.15 per share, leaving $48.59. DEBT. Borrowings at December 31, 2025 were $45.5 billion (commercial paper and loans $1.6 billion, current long-term debt $1.8 billion, long-term debt $42.1 billion) plus $1.4 billion of debt inside businesses held for sale, about $46.9 billion. The debt carries roughly 3.9% interest against our 6% yardstick, which lowers its value to us by about $5.4 billion (the company's own fair value of $39.4 billion against a $43.9 billion book value points the same way). We add $2.1 billion for outside owners of consolidated subsidiaries and subtract $12.8 billion of cash and investments beyond about $3.0 billion needed to run the business ($15.8 billion in total). Net debt is about $30.8 billion, or $7.15 per share. Long-term maturities are $1.8 billion (2026), $4.8 billion (2027), $2.9 billion (2028), $3.0 billion (2029) and $3.4 billion (2030); the company reports $7.2 billion of unused credit lines, and no restriction in its debt is described as significant. THE IRS DISPUTE. The Tax Court ruled against Coca-Cola on how income from foreign licensees is allocated. The company paid $6.0 billion in September 2024 to stop interest and is appealing to the Eleventh Circuit; it has reserved only $512 million. The filing estimates that if the IRS method is upheld for 2010 through 2025 the additional tax and interest is about $14 billion, and the ongoing tax rate would rise about 3.5 points. On October 1, 2025 the Eighth Circuit rejected the same blocked-income rule in the 3M case, which supports Coca-Cola's position, but it does not bind the Eleventh Circuit. Because the outcome is unknown, the base case counts neither a refund nor an extra payment. BEAR CASE, $28.90 per share. The starting level is $2.49 (the median including 2020) with no growth for ever, the IRS prevails (an extra $14 billion is paid, about $3.25 per share, and about $0.56 billion a year, $0.13 per share, of extra tax is charged), and the $6.0 billion deposit is lost. Serial write-offs of acquired brands support the caution: $960 million on BodyArmor in 2025 and $760 million in 2024, plus a $1.3 billion write-down on businesses held for sale. The business is worth $39.30 per share, it owes $7.15 of net debt and $3.25 of IRS liability, leaving $28.90. Business cash flow of roughly $10.7 billion a year still covers interest of $1.7 billion many times over, and the largest maturity is $4.8 billion in 2027. BULL CASE, $65.60 per share. The starting level is the 2025 level of $3.24 that the business has already reached, growing 4% a year for five years and 3% for five, then flat, and the Eleventh Circuit rules for Coca-Cola so the $6.0 billion deposit plus about $385 million of accrued interest is returned in 2027 (worth about $1.32 per share today). The business is worth $71.43 per share, the refund adds $1.32, and net debt subtracts $7.15, leaving $65.60. WHAT CHANGED. Our earlier analysis showed $22.87, $51.40 and $96.90. That version used a simpler earnings measure, older debt figures, and higher required returns with perpetual growth of 4% to 5.5%. This version uses a steadier 6% yardstick, counts only growth we can evidence (volume is flat, so the bull growth is lower), and charges the IRS dispute and the debt taken on for the IRS deposit and the fairlife payment explicitly. The floor moves up and the top moves down. MARGIN-OF-SAFETY PRICE. The margin-of-safety price is $33.00, about 32% under the base case and about 14% above the bear case: this is a predictable business, but the pending IRS appeal and flat volume call for a wide cushion. WHAT WOULD MAKE THIS WRONG. Unit case volume turning negative, pricing power fading, a loss in the IRS appeal larger than the $14 billion estimate, or further write-offs of acquired brands.