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Deliberate Practice: Coke (KO) 1988

July 15, 2012 | About:
whopper investments

whopper investments

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This is the second in a series of weekly posts aimed at establishing a process for becoming a better investor through deliberate practice, based on suggestions found in Moonwalking with Einstein and Outliers. I will post my analysis of the company, as well as a post-mortem of how the investment played out (if we’re studying a historical investment) and the next investment for analysis, next weekend. Please be sure to review why we’re doing this and my suggestions/instructions if you’ve yet to do so, and please leave your analysis in the comments of this post before next weekend if you choose to participate.**** Following up on last week’s analysis of Buffett’s purchase of DQ, I thought we’d do another of Buffett’s investments this week. In fact, this might be Buffett’s most famous investment of all.

In 1988, Buffett began buying Coke stock like a madman. I’ve seen several quotes saying that analysts thought Buffett was crazy, as the stock had been on a multi-year tear and was trading near all time highs (check this chart out- the stock had already more than tripled that decade and that excludes their hefty dividend).

But Buffett was undetered and bought 7% of the company in 1988 and 1989… more than $1B worth. That was quite the investment at the time- I believe Berkshire’s market cap was under $10B back then!

So, with all that said, let’s try to see what Buffett saw back then. Here’s Coke’s 1988 annual report. It includes financials going back all the way to 1978 (see page 34). Using this will allow you to value Coke right in the middle of Buffett’s buying spree.

And, before I let you go, keep in mind that interest rates were much higher at the time- around 9% for ten year government bonds. That said, the LBO market was relatively new, and banks were allowing PE funds to buy companies with as little as 3-5% equity financing. Given Coke’s strong cash flows and business predictability, it’s not crazy to think that they could have really levered themselves up back then. I don’t say this to influence you one way or the other… I only say it to give some historical context.

Finally, good luck in your analysis. I will post my analysis Saturday and the post mortem and next week’s project on Sunday Please post your analysis in the comments section before then.


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