Warren Buffett Takes the Pepsi Challenge

Warren Buffett weighed in on Coke and Pepsi this month. Which stock won the challenge?

Mar 22, 2014 at 9:00AM

When Warren Buffett drinks soda, investors listen. Earlier this month, the Sage of Omaha (who's famous for a junk food-fueled diet that includes Cherry Coke) poured investors some advice with his take on Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP).

Which stock won Buffett's Pepsi Challenge? Read on for Buffett's analysis of the soda rivals.

Buffett rebuffs Peltz
PepsiCo has been volatile lately. That's due to activist shareholder Nelson Peltz, whose public pressing for Pepsi to spin off its Frito-Lay snacks division has made a loud crunch in the investment world. Peltz argues that Pepsi and Frito-Lay are both suffering decreasing returns to scale thanks to a bloated corporate bureaucracy and lack of entrepreneurship.

Buffett's take: "I don't see any reason to split them up." Buffett sees Frito-Lay and Pepsi as winning businesses, while agreeing with Peltz that Frito-Lay's doing better right now. Given Buffett's investment and dietary tendencies toward simple, reliable food businesses like Dairy Queen and Heinz Ketchup, it makes sense the Sage favors Pepsi and Frito-Lay.

Buffett is a proud Coke investor
While Buffett sees Pepsi and its Frito division as sound, his money and mouth lean toward Coca-Cola. Although certain investors are worried that the stock's growth will soften, Buffett's a proud investor and drinker with Coca-Cola as one of his "Big Four" investments.

Buffett sees Coca-Cola as a well-branded American drink, and as the world's soda fountain: "I think [Coke's] got wonderful brands and wonderful acceptance around the world; Coca-Cola brand itself sold 100 million more cases last year, as I remember, than the year before and it sold more that year than the year before. It's a very, very good business."

That's a strong vote of confidence from Omaha's Wizard. As Buffett noted, Coca-Cola's ubiquity is stunning: Coke constitutes 3% of global liquid consumption (making it a rival to water), and "Coca-Cola" is the second most-known phrase in the world behind "OK."

Coke and Pepsi losing fizz?
Despite Warren Buffett's recent endorsement of both Coke and Pepsi, these stocks face challenges. Shrinking soda-drinking rates, especially in health-conscious developed nations, means these rivals are sipping profits from a smaller soda can.

Warren Buffett's probably right that if Coke's a sound investment, so is Pepsi. Duopolies like the soda industry spend tons of money on advertising to remain competitive, with neither company the clear winner. Coke and Pepsi's dividends are also close at around 3%.

But Coke may have a leg up on Pepsi in the home soda consumption market, thanks to a deal made earlier this year to sell beverages for the Keurig Green Mountain home soda machine.

Perhaps such first-mover innovation explains why Buffett invests in Coke over Pepsi.

Foolish bottom line
Investors challenged to buy Coca-Cola or Pepsi shares should take comfort in Buffett's endorsement of both soda makers. Both will float or fizz along with the soda industry.

What would Buffett do?
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Glenn Singewald has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of Coca-Cola and PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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