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Q2 2022 hedge fund letters, conferences and more
What’s interesting about Coca Cola is that Warren Buffett owns more than 9% of the company
Highlights:
- Centralized portfolio to maintain superior profitability
- Leveraging revenue through organic growth and acquisitions
- A cash cow with stable and growing dividends
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Do you want to hear a fun fact about Warren Buffett?
Do you want to hear a fun fact about Warren Buffett?
- Warren Buffett bought Coca Cola shares for the first time in January 1988
- Since then, the share price has increased by more than 2400%
- Also, he never sold a single share of it
- Here is the reason why
- “No business ever failed with happy customers. selling happiness.”
Coca Cola has created one of the most memorable commercials ever
Revenue breakdown 2021
Centralized portfolio to maintain superior profitability
- PepsiCo and Coca Cola are fierce competitors
- Interestingly, their strategy to expand market share differs significantly
- PepsiCo has diversified its product portfolio and encompasses food and snacks
- It is also considered a price setter in the market
- Coca Cola stayed centralized on beverages and is rather considered as a price follower
Higher net profit despite having much less revenue
- The expansion of product lines has led to a rise in Pepsi’s revenue, which is now 2 higher than Coca Cola
- However, Coca Cola has superior profitability leading to a similar bottom line
Leveraging revenue through organic growth and acquisitions
- Despite Coca-Cola being such a big brand, there are still many people who haven’t consumed a product from it yet (The grey portion of the graphic)
- To grow in emerging markets, it bets on offering affordable products
- In developed countries, it increasingly focuses on premiumization
Acquisitions are key to reaching new consumers
- Acquisitions allow Coca Cola to stay up to date with markets trends
- Given the strong cash flow generation, we don’t see a risk that it can’t continue growing its dividends over time
- The company even has massive share buyback programs to return excess cash to shareholders
Consensus is bullish
- Most analyst have a BUY recommendation on the company, but the upside is rather small
- Analysts predict stable revenue growth an a net margin expansion
Get financial statements and assumptions in the full report
P&L – Coca Cola
- Coca Cola has a one-of-a-kind profitability, leading to a super strong bottom-line
Balance sheet – Coca Cola
- Acquisitions are an integral part of the business to drive revenue growth
- The company uses excess cash to buyback shares, providing additional return for shareholders
Ratios – Coca Cola
- High payables outstanding illustrates the bargaining power it has over its suppliers
- Strong dividend payout ratio contributed to a solid annual 3 – 3.5% dividend yield over the past few years
Free cash flow – Coca Cola
- Coca Cola is a cash flow machine and there is no reason to assume differently for the future
Value estimate – Coca Cola
- Deglobalization trend could result in lower-than-expected revenue
- However, I agree with the consensus that Coca-Cola can defend its massive margin over time
- I value the company by using FCFF and a terminal growth rate of 3%
- Recently, its PE was trading two standard deviations higher than its long-term average
Key risk
- Failure to meet changing consumer behavior (e.g., increasing health awareness)
- Lower-than-expected synergies from acquisitions
- Deglobalization trend could benefit local brands
Conclusions
- Coca Cola is a fantastic brand with a massive profitability
- Shareholders benefit from high dividends and share buybacks
- Though, valuation might be a bit too high
Download the full report as a PDF
Article by Andrew Stotz, Become a Better Investor.
