KO - Coca-Cola Company

[rb]

Well Coke is still very well positioned for profits even now.

[DTEJD1997]

One of WEB MAJOR mistakes was not selling KO in the late 90's. 

 

If I recall correctly it was selling for something like 70x normalized earnings.

 

KO is a good company with a great business model...but EVERYTHING is sell at some point.  I don't think KO is even back to it's high point, and it has been 15+ years.

 

If WEB had sold, he could have bought back in a few years later for well less than 1/2 of what he sold it for.

 

Additionally, it can be argued that KO is being run for the benefit of management, NOT shareholders.  Look at top management over the years.  These guys are like landed gentry....They have become incredibly rich.  Shareholders?  not so much...

[vinod1]

I've been reading Coca-Cola's annual reports from the 1980's, trying to see what Warren Buffett found so compelling that he placed nearly 25% of Berkshire Hathaway's net worth into the stock.  The 1988 report is particularly eye opening and fun to read.  I've posted it at the link below, for any Buffett/Coke history buffs:

 

http://healthywealthywiseproject.com/2015/09/what-did-warren-buffett-see-in-coca-colas-1988-annual-report/

 

(hopeful the pdf viewer will work with your web browser)

 

I can't think of a current company which is better positioned for profits than Coke was in the late '80's.

 

Thank you for sharing the 1988 Coke report.

 

I studied Buffett's purchase of Coke a while back and have been trying to collect Coke AR's from the 1970s and 1980s ever since.

 

I would be very grateful if you could share any additional reports from that period. A kind soul shared 1975, 1977, 1982 and 1983 reports on these boards and still have them if you are interested.

 

Vinod

 

 

[rb]

One of WEB MAJOR mistakes was not selling KO in the late 90's. 

 

If I recall correctly it was selling for something like 70x normalized earnings.

 

KO is a good company with a great business model...but EVERYTHING is sell at some point.  I don't think KO is even back to it's high point, and it has been 15+ years.

 

If WEB had sold, he could have bought back in a few years later for well less than 1/2 of what he sold it for.

 

Additionally, it can be argued that KO is being run for the benefit of management, NOT shareholders.  Look at top management over the years.  These guys are like landed gentry....They have become incredibly rich.  Shareholders?  not so much...

I agree that we'd have more money now if Buffett would have sold Coke and then repurchased it. But he probably wanted to hold it for the long term and it would have been very difficult to dance in and out of such a huge position. I think he spoke about that at one point.

 

Regarding your point on valuation, Coke stock price right now is back to about where it was at its peak in the 90s. So if you bought at the peak you basically just made the dividend. But the if you bought at the peak you were an idiot and you deserve it.

 

It's true that Coke is very generous with its management and it always has. I guess as shareholders we have to get comfortable with that. But shareholders have done very well owning coke as well. I'm gonna ignore the late 90s period since that was some freaky event. So if we go back to the 1980s from 1980 to today coke returned 4,000% more than the S&P 500.  From 2000 to today Coke returned 40% more than the S&P and for the last 10 years it returned 20% more than the S&P. These figures don't include the dividend which generally was higher than the S&P.

 

So while the shareholders didn't really make out like management (Goizueta was the first manager in the world to become a billionaire) they still did pretty good.

[Cigarbutt]

It seems that KO may be suffering from diminishing returns due to scale.

Really interesting to evaluate the path chosen. Maybe a poster child of the era.

 

Selected comments from Alhambra investments (today):

 

"We were doing some research earlier this week on a company whose bonds we were considering. This is a blue chip company that everyone knows or at least thinks they do. See if you can identify this company:

Current dividend yield: 3.2%, Payout ratio: 140%

Trailing P/E: 44

Price/Book: 9

Price/Sales: 5

 

Since 2011: Revenue has declined from $46.5 billion to $37.31 billion TTM. Operating income has fallen from $10.2 billion to $7.5 billion. EPS has dropped from $1.85 to $1.04 TTM. Free cash flow is unchanged. ROA has dropped from 11.21 to 4.93, ROE from 27 to 19. Interest expense has risen from $397 million to $879 million. Debt/equity is 225%.

 

I could go on but I think you get the picture. The company has not performed well over the last 5 years and it has ramped up debt to pay an increasing dividend; a pretty typical financial engineering blueprint for a mature company these days. The stock is near an all time high although I’ll grant you that its performance has lagged the S&P 500 somewhat. This is what you get when you hold interest rates too low for too long.

 

The company? That is none other than Coca Cola. Yes, I know there is more to analyzing KO than just citing these metrics. They’re executing a plan to refranchise their bottlers and that will undoubtedly unlock loads of corporate value which can justify the stock price and C-suite salaries. Hmmm. Interesting choice of words, refranchise, which isn’t an actual word that exists outside of analyst-speak. The word implies that at some point in the past KO defranchised their bottling operations. Which they did and which was also supposed to unlock shareholder value. One wonders if anyone is making any actual money here other than the executives and their bankers. But I digress…."

 

 

 

 

Of course this capital allocation game has been going on for quite some time in this stocks are cheap environment.

 

Question:

 

Who is buying KO at these prices?

 

 

[Guest Schwab711]

These are surface level comments of the financials and seem to ignore the dynamics of the underlying business. Revenues fell because they have moved away from EM bottlers. 2018 ROE is going to exceed 30%. "True" ROIC is probably in the neighborhood of 20% right now. KO is still a fantastic business and will be for the foreseeable future. It's probably in the low-end of the FV range right now (I see ~23x earnings power).

 

I would definitely consider investing at today's price if I was managing a very large fund or the retirement account for an older individual (and certainly for a more risk averse entity/person). I'd even say KO is attractive right now for insurance companies with strong underwriting.

 

Edit: I wasn't really thinking of BRK even though it seems like I am. I was just trying to think of scenarios where I would own KO. I'm guessing WEB is wondering what took me so long to figure out that it's perfect for BRK and the low rate environment (and consequential skewed interest rate risk) further reinforces this concept.

[randomep]

 

I always had this nagging question about coke. They say coke formula is so valuable that it is locked away in a safe and only 2 people know it or something like that.

 

I am thinking how can it be a secret??? somebody has to acquire all the ingredients to make the finished product (syrup) so how can someone in the company not figure out how to make it... it has always puzzled me

[rolling]

 

I always had this nagging question about coke. They say coke formula is so valuable that it is locked away in a safe and only 2 people know it or something like that.

 

I am thinking how can it be a secret??? somebody has to acquire all the ingredients to make the finished product (syrup) so how can someone in the company not figure out how to make it... it has always puzzled me

Isn't that a mith created to build the brand? Basically they meant the recipe is so unique and tasty that it must be locked away so nobody would steal it... I believe I read that somewhere...

[Spekulatius]

 

I always had this nagging question about coke. They say coke formula is so valuable that it is locked away in a safe and only 2 people know it or something like that.

 

I am thinking how can it be a secret??? somebody has to acquire all the ingredients to make the finished product (syrup) so how can someone in the company not figure out how to make it... it has always puzzled me

Isn't that a mith created to build the brand? Basically they meant the recipe is so unique and tasty that it must be locked away so nobody would steal it... I believe I read that somewhere...

 

Yes, the coke formula is just for the mystique. Coke isn’t that complicated. I am fairly sure competitors have gotten it reverse engineered chemically using mass spectroscopy and other methods. The brand would be much harder to reverse engineer than the ingredients and that’s where the value lies.

[alpha]

 

Coke moving into the coffee shop business, seems like an odd move to buy the actual retail locations.

 

https://www.reuters.com/article/us-whitbread-m-a-coca-cola/coca-cola-takes-plunge-into-coffee-with-5-1-billion-costa-deal-idUSKCN1LG0LG

[rkbabang]

Coke also bought Moxie this week, which was big news around my area because the corporate headquarters is located in my town.  It's a regional brand (10 years older than Coke itself) and an acquired taste.  I've never liked it.

 

"There’s really nothing to compare it to. It’s not a cola, and it’s not a root beer; it’s its own little niche”

http://www.unionleader.com/business/bedford-bottler-sells-moxie-brand-to-coca-cola-20180828

 

[Deepdive]

Fun anecdote, Coke sells for roughly the same price in Chinese RMB today versus the 1980s in China. 

[cameronfen]

 

Coke moving into the coffee shop business, seems like an odd move to buy the actual retail locations.

 

https://www.reuters.com/article/us-whitbread-m-a-coca-cola/coca-cola-takes-plunge-into-coffee-with-5-1-billion-costa-deal-idUSKCN1LG0LG

 

If the article is right and Coke is buying Costa coffee for 16x earnings that is a steal.  From my visit to China, Costa was the second biggest coffee chain after Starbucks there, I think.  Definitely very distant second, but huge runway for growth.  Besides, it seems like the economics for coffee shops is really good in terms of ROI. 

[rukawa]

One of WEB MAJOR mistakes was not selling KO in the late 90's. 

 

If I recall correctly it was selling for something like 70x normalized earnings.

 

KO is a good company with a great business model...but EVERYTHING is sell at some point.  I don't think KO is even back to it's high point, and it has been 15+ years.

 

If WEB had sold, he could have bought back in a few years later for well less than 1/2 of what he sold it for.

 

Additionally, it can be argued that KO is being run for the benefit of management, NOT shareholders.  Look at top management over the years.  These guys are like landed gentry....They have become incredibly rich.  Shareholders?  not so much...

I agree that we'd have more money now if Buffett would have sold Coke and then repurchased it. But he probably wanted to hold it for the long term and it would have been very difficult to dance in and out of such a huge position. I think he spoke about that at one point.

 

Why repurchase it? Why not just outright sell it. Coke is a piece of paper or should have been as far as Buffett was concerned. Why the religious attachment like he has to own it because its part of his identity.

 

 

[johnny]

Coke moving into the coffee shop business, seems like an odd move to buy the actual retail locations.

 

Increasing consolidation in retail space weakens Coke. Starbucks has no interest in reinforcing their brand, and will aggressively/happily steer its traffic to in-house alternatives.

 

In a world with 2,000 independent soda jerks, Coke can just make syrup and presume that all retailers will be fighting over access to it. In a world with 4 retailers, it's a pretty different picture, especially if Coke views its future growth as premised on its ability to distribute (and create demand for) newly developed/acquired brands.

[rkbabang]

Apparently Coke has a new slogan in New Zealand: “Hello Death”.

 

 

https://boingboing.net/2018/10/15/coca-cola-trying-to-mix-maori.html

[rb]

LOL! Somebody just got fired.

[boilermaker75]

LOL! Somebody just got fired.

 

 

But they were being accurate about what the high-fructose corn syrup, or sugar, will do to you!

 

[rkbabang]

LOL! Somebody just got fired.

 

 

But they were being accurate about what the high-fructose corn syrup, or sugar, will do to you!

 

 

Truth in advertising.

 

[wolverine890]

https://www.wsj.com/articles/coke-can-launch-monster-energy-rival-arbitrator-rules-11561988619

[ERICOPOLY]

Did anyone notice the beating this has taken?  Did they go into banking?  If Berkshire doesn't add I will be surprised.  This appears to be over restaurant traffic declining due to the pandemic.

[Sullivcd]

I looked at it, still expensive though

[rb]

Did anyone notice the beating this has taken?  Did they go into banking?  If Berkshire doesn't add I will be surprised.  This appears to be over restaurant traffic declining due to the pandemic.

Berkshire has a standstill with coke so they won't buy.

 

I actually sold out of this around 59 before the craziness started. I bought in at 35 and it wasn't an entirely pleasant hold. Maybe I'll buy it again if it goes further below.

[ERICOPOLY]

I looked at it, still expensive though

 

It always is.

 

I found this interesting:

 

https://www.quora.com/What-was-the-P-E-Buffett-paid-for-Coca-Cola

 

[Orchard]

Those numbers look way off. I used to have the 1986-1989 annual reports for KO and based on what i saw the pe was way lower than what's in here.

 

Here's also a link to Joel Greenblatt's class where he was comparing Moody's to Buffett's KO purchase. In it he used a PE of 13x for Buffett's KO purchase.

 

http://www.hedgeroll.com/hedgeroll/joel-greenblatts-special-situations-class-at-columbia-business-school-featuring-rob-goldstein-partner-at-gotham-capital-1-of-2-on-moodys