Why Warren Buffett Loves Coca-Cola

Coca-Cola has a strong business that has helped enrich Warren Buffett and many other investors over the last century.

May 10, 2014 at 9:23AM

As Berkshire Hathaway hosted its annual shareholders meeting the other week, this seems like a fitting time to review one of Berkshire Chairman and Chief Executive Officer Warren Buffett's favorite companies, Coca-Cola (NYSE:KO).

Warren Buffett is known as one of the world's greatest investors yet his investment style reverses the strategies of most other Wall Street icons. Instead of buying the hot stock of the month, Buffett is known for buying companies or pieces of companies that have durable competitive advantages, as well as companies he can understand that the market may not currently favor.

What are some of the factors that may have driven Buffett to acquire a large stake in Coca-Cola, and where can this company go from here?

Competitive advantages
A competitive advantage is anything from size, to brand power, to barriers of entry, among many other factors. A durable competitive advantage is any of those things that will withstand the test of time. These are what we look for in companies we want to buy.

Coca-Cola's brand name alone is most likely worth more than many publicly traded companies. Forbes has estimated the value of the brand at over $50 billion, ranking it the third-most-valuable brand in the world.   From a consumer perspective branding is huge, as the company has succeeded in making consumers think of Coca-Cola when they think of soda.

When you're out at a restaurant you don't order by saying "can I have a soda, please?" You will typically say "Coke, please?" or "Sprite, please?" (Coca-Cola owns the Sprite brand) This is the company's brand power at work.

Coca-Cola's brand name is so strong that it does not have to engage in price wars with store-brand colas and other small drink makers to make consumers purchase its products, which does wonders for its margins.

Next is Coca-Cola's size. At one point around 100 years ago the company just sold one product with a secret recipe. Now, along with its namesake drink which uses the same secret recipe, Coca-Cola offers bottled water, flavored soft drinks, sports drinks, and more with over 100 worldwide brands.

If you're out at a restaurant or stopping by a drink machine anywhere in the world there's about a 50/50 chance you're going to be purchasing a Coca-Cola product, with the other 50% chance involving a sale for the company's largest competitor, PepsiCo. Though PepsiCo and Coca-Cola are stiff rivals and competitors, 50/50 odds are extremely good in comparison with most other highly competitive industries out there.

What these advantages have done for Coca-Cola
Coca-Cola's durable competitive advantages have been very good for the company and its shareholders over the years. Some of the key measures Coca-Cola excels on because of its advantages are growth and profitability measures.

Starting with growth, even as a large company in what most would consider a mature industry, Coca-Cola has grown its revenues and earnings by an average of 7.9% and 5.9% per year, respectively, over the last ten years.

As I mentioned margins earlier, Coca-Cola's margins benefit from the company's competitive advantages. Over the last ten years, the company has had stable and extremely high net profit margins that have averaged over 21%. Other profitability ratios are very strong as well. Over the same time-frame we can take a look at return on assets and return on equity to see that they averaged nearly 15% and 30%, respectively.

Stable and reliable numbers are great for companies that we may want to invest in. Though 5.9% earnings growth may not be that high, if it is something we can count on to happen each and every year, valuing this company is relatively simple and we can find opportunities to buy the company at very attractive prices.

Fool's bottom line
At The Motley Fool our goal is to help the world invest better, and taking the time to study great investors like Warren Buffett and the rationale behind his investments can really go a long way towards achieving that.

Coca-Cola has competitive advantages that have withstood the test of time, and they appear to have the durability to continue. Currently selling at almost 22 times earnings, Coca-Cola is a bit more expensive than the market, which sells at 18 times. I think the premium to the market is well deserved in this case, as Coca-Cola has shown that it is an excellent business for stockholders and I believe it will stay that way for the foreseeable future as well. 

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Jacob Meredith has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway, Coca-Cola, and PepsiCo. The Motley Fool owns shares of Berkshire Hathaway, 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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