Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 0
Here's the Rule Maker analysis for Coke vs Pepsi using FY1994 numbers:

Coca-Cola Pepsi
Current Period Year-ago PeriodYear-over-Year Current Period
FY 1993 FY 1992 Growth FY 1993
Income Statement . . .
Sales 13,957 13,074 6.8% 25,021
Cost of Goods S 5,160 5,055 2.1% 11,946
Net Income 2,176 1,664 30.8% 1,588
Shares Outstand 1,302 1,317 -1.1%

Balance Sheet . . .
Cash & Equivale 1,078 1,063 1.4% 1,801
Current Assets 4,434 4,248 4.4% 5,109
Short-term Debt 1,672 2,087 -19.9% 824
Current Liabili 5,171 5,303 -2.5% 6,575
Long-term Debt 1,428 1,120 27.5% 7,443

Margins & Ratios . . .
Gross Margins 63.0% 61.3% 1.7 52.3%
Net Margins 15.6% 12.7% 2.9 6.3%
Cash-to-Debt 0.35 0.33 4.9% 0.22
Net Cash -2022.0 -2144.0 N/A -6465.6
Fool Flow Ratio 0.96 0.99 -3.2% 0.58



Ranking Rule Makers

1) Brand Points (0-1) 3) Financial Dire Points (0-3)
Familiarity 1 Sales Growth 1
Openness 1 Gross Margins 3
Optimism 1 Net Margins 3
Legitimacy 1 Shares Outstandin 3
Inevitability 1 Cash-to-Debt 2
Solitariness 1 Fool Flow Ratio 1
Humor 1 Expansion Potenti 3
Subtotal 7 Subtotal 16

2) Financial Loca Points (0-2) 4) Monopoly Statu Points (0-4)
Mass Market Habit 2 Gross Margins 4
Gross Margins 2 Net Margins 4
Net Margins 2 Net Cash 4
Cash-to-Debt 0 Fool Flow Ratio 0
Fool Flow Ratio 2 Convenience 4
Your Interest 2 Subtotal 16
Subtotal 10
5) Your Enjoyment 1

Total Score = 50 Top Tier!

Unfortunately, Pepsi's 1994 10-K isn't available online (so far as I can tell), so I wasn't able to access the 1992 numbers necessary for running the Ranker on PEP vs KO. But, judging by the numbers above, I think it's safe to say that Pepsi would've probably ranked in the third tier.

How did Coca-Cola perform vs Pepsi over the past 5 years?

From 1/3/94 thru 1/4/99, here are the returns including reinvested dividends:

KO PEP
Total Return 220.4% 135.3%
Annualized 26.2% 18.7%

So, in this case, the Rule Maker rankings certainly would've identified the better company. However, backtesting such as this is really of limited usefulness. I think it's clear that the RM rankings do a good job of identifying high-quality businesses that stack up well against the competition. But, it would be wrong to conclude that companies scoring > 50 can be expected to always generate 20%+ returns over every 5 year period.

All we know is that by buying the best-quality companies, we can reasonably expect to outperform the market indices (primarily the S&P 500) over long periods of time, especially periods of a decade or longer.

Best,
Matt
Print the post Back To Top
No. of Recommendations: 0
Matt,


Given that the RM strategy is designed for 10 plus year holding periods shouldn't we test it for the same or even longer. Unfotunately some of the older data is difficult to access on line but it must be out there. It would be a good exercise to apply the criterea to a group of companies based on 1989 data and see how things went. This exercise could prove useful if I/we could just get our hands on the info.

Thoughts?

-MarkV
Print the post Back To Top
No. of Recommendations: 0
Matt,


It would be interesting to find companies that scored well yet failed to grow and companies that scored poorly yet "beat the market" The examples would be very educational and might lead us to some new insights into how to analyze our companies. Other than KO I might suggest looking at MSFT, PFE, SGP, IBM, GM, GE and a handful of other huge companies based on 1989 data and see how "predictive" the RM score really was.
If I could only get my hands on the 1989 data...Suggestions? comments? other fools, anyone? anyone...Beuhler?

-MarkV
Print the post Back To Top
No. of Recommendations: 0
Sorry about the two nearly duplicate posts. The first didn't look like it went though.
Print the post Back To Top
No. of Recommendations: 0
<< However, backtesting such as this is really of limited usefulness. >>

When I was around the RMP when it was the Cash King portfolio, we didn't even have a spreadsheet. The RMP numbers certainly help juggle and weigh the various factors that help one determine if a stock fulfilled the RMP criteria, but, like any "single number says all" rating, don't mistake the number for the company.


Washu! ^O^
Print the post Back To Top
No. of Recommendations: 0
When I was around the RMP when it was the Cash King portfolio, we didn't even have a spreadsheet. The RMP numbers certainly help juggle and weigh the various factors that help one determine if a stock fulfilled the RMP criteria, but, like any "single number says all" rating, don't mistake the number for the company.

AMEN!!! Thanks for summing that up for me, Washu.

-Matt
Print the post Back To Top
No. of Recommendations: 0
I agree. I'm actually not sure how much I'm going to use the point scoring part of the analysis. I preferred the previous style of crunching as many numbers as possible and then going with a yes/no. The scoring system seems a little rigid to me.
Print the post Back To Top
No. of Recommendations: 0
I preferred the previous style of crunching as many numbers as possible and then going with a yes/no. The scoring system seems a little rigid to me.

Okapi,

If that's the route you want to go, that's perfectly fine. Four times out of five, you'll reach a similar conclusion as a user of the Ranker. In fact, I'm in the process of updating the Rule Maker steps, and our new criteria step incorporates a little more of the Rule Book's thinking, while retaining the simple structure. Hopefully, I'll have that complete in the very near future. (So much to do, so little time!)

The advantage of the Ranker is that it's much more rigorous. There are many shades of gray when evaluating criteria as "yes/no," and the Ranker helps to quantify those shades. As for it being too rigid, I'd say it all depends on how you use the rankings. As stated in the spreadsheet, the scores are only meant to be a guideline to help begin the thinking process. Not all scores of 42 are created equally. As I stated in my last post, Coke's 1998 results scored a 42 against Pepsi. But 1998 was a very tough year in overseas markets, so we know that Coke's 42 represents a temporarily lower number than can be expected again in the future. OTOH, another company's 42 (no examples off the top of my head) could be either the best it can expect to achieve, or maybe a score that's heading towards Tier III in future quarters. So, as you can see, we would be quite foolish to use these scores (or any single metric for that matter) too rigidly. A dynamic business simply cannot be bottled up in a single number, try as we might!

I hope this helps.

Fool on,
Matt
Print the post Back To Top