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The Ultimate Everlasting Business

December 03, 2013 | About:

At the current level, I think it still makes sense to buy Warren Buffett's most praised business: The Coca-Cola Company (NYSE:KO). Its wonderful economics – it operates in a business protected by very high barriers to entry - and the company's best-in-class global footprint are now in perfect conjunction with a fair valuation. Actually, Coca Cola's historical 10% to 15% premium to its peer global consumer goods companies has disappeared.

Three Main Reasons to Be Long Coca-Cola

One: Cost savings could be much higher than expected. According to Credit Suisse's analysts, Coca Cola might largely surpass its cost saving target by as much as 300%. This means that the world's soft drinks leader would be able extract up to $1.5 billion in efficiency gains from its value chain- or 7% of total costs. According to Coca Cola, the value chain optimization program goes around four basic areas: (1) Global supply chain optimization (2) Leverage on global marketing. (3) Operating expense leverage. (4) Data and IT standardization. That said, I think most of the efficiency gains will be a result of the optimization of the company's supply chain. The new plan is supposed to resemble what AB InBev (NYSE:BUD) has been doing for a while in the beer industry: Very few, large and efficient breweries produce and package all the volume which is distributed via independent wholesalers and distributors.

Two: Coca Cola could start improving its growth performance in key markets. As a matter of fact, the sequential volume growth the company showed during its last quarterly results – 2% in the US and 9% in China - could keep improving going forward. Latin American volumes were the only drag to expectations mainly given by Brazil (volumes were down by 1% in the quarter) and Mexico (volumes were down by 2% in the quarter), the region’s biggest countries by GDP. Nevertheless, the drag in volumes was accompanied by a 12% increase in the price mix.

Three: Price versus value looks attractive. As I just mentioned before, the price premium Coca Cola used to have versus its peers is now closed. That said, I do not believe the value gap is closed at all. Coca Cola still has the stronger global distribution network among all its peers, even the almighty AB InBev. Coca Cola sells for 2014 17.6 times earnings and pays a 2.8% cash dividend yield. Peers such as AB InBev or PepsiCo (NYSE:PEP) – its weaker direct competitor – sell for 2014 17.7 and 18 times earnings and pay 2.45% and 2.7% cash dividend yields, respectively.

Bottom Line

Coca-Cola, which is not only held by Warren Buffett but also by other great investors like Joel Greenblatt, is the one stock every long term value driven portfolio should hold. The company is cutting costs, growing volumes and selling for a fair price. Besides, it pays an always growing cash dividend yield. Even when we shall wait until 2015 to see the final results of the company's efficiency program initiatives, now it looks like its a good time to start buying the shares.

Rating: 3.0/5 (1 vote)


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