Wednesday, February 11, 2009

Coca Cola's Financial Subscript

Coca Cola Enterprises (CCE) reported Q4 loss of $2.99 per diluted share including a non-cash impairment charge of $2.3 billion in North America, caused primarily by non-operating factors. Interesting choice of words “non-operating factors”. We are also supposedly comforted by the words “non cash.” The word loss is not supposed to have the negative connotation here that it would normally have.

Read this quote which is the explanation “The non-cash impairment charge is the result of CCE’s impairment analysis in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” and is necessary to reduce the book value of the company’s North American franchise license intangible assets to their estimated fair value in light of financial market conditions and CCE’s stock price.”

OK so the financial markets are in a mess. So therefore the intangible value of franchise licenses to sell Coca Cola needs to be written down, is what we are to believe. In reality management had intangibles at inflated valuations and is using the current economic difficulties to skate the valuations on side. It is not so much the news of today that is important but the mistakes of yesterday. Coca Cola management has been swimming without their bathing suits to quote a rather famous investor.

Management is also claiming the valuations are adjusted downwards in part because of CCE stock. CCE stock 52 week high of approximately $25.46 was last seen about 52 weeks ago. Today the stock was around $13.00. Management needs to further explain the connection between CCE stock price and the trigger points that brought SFAS No. 142, “Goodwill and Other Intangible Assets into play."

They will comment on sugar and transportation costs as well as the marketing challenges; all of which are critical issues. They also need to explain the financial engineering subscript that causes reductions in valuation. Just saying they are non cash is insufficient.