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Berkshire Hathaway
At What Price KO?

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By John3haha
September 14, 2004

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Hi all,

There was a sparsely attended poll on this board some time back suggesting many here think KO is an OK opportunity right now but no great shakes. I have had my eye on KO for some time and wondered if any of the bright folks here would share their thoughts on what an attractive price for KO might be and/or what else looks better. On this board, the obvious response might be BRK. I know many here disagree, but my wife and I limit our BRK exposure to under 25% of our portfolio and we've been maxed out for years. This is just a ground rule we are playing the investment game under.

I also know some value investors here prefer small caps when looking for bargains. I have had difficulty finding the time to sort through the masses and find much I like. We try to only trade our portfolio in September and April, so I prefer LTBH with "low maintenance" companies. To give you a feel, we have owned GE since I graduated from college in 1987. We have not bought any more GE but feel comfy letting 4.4% of our portfolio sit there indefinitely. We stepped in to CX a couple times for nice gains but want the price back down closer to $20 before we try and ride that train again. We hold NEOG now, liking the food & feed safety / disposable testing kit business model with this management team. If we could get comfy with commodity and political risks associated with fresh fruit and get our heads around the long-term value of a branded pineapple, FDP might be attractive, but we ain't there yet. Still, my overall point here is that I do not have a compelling insight into good small cap opportunities right now. I'd love to look at anyone else's small cap ideas but just saying to look there is not going to solve our "where do we put our money" question.

To give a flavor for what we buy, we recently put about 5% of our portfolio into NOK and own a basket of pharmas (MRK, JNJ & GSK) taking up another 14% of our portfolio. That is about it for recent purchases.

On KO, the company's brand name and infrastructure seem huge competitive advantages likely to serve as a "moat" in Buffet's sense of that word over the very long term. I see two big opportunities for long term growth, increased demand from the developing world and potential distribution of water if current trends continue. Now, it is unclear if KO will return to the kind of growth curve seen in the 80s and 90s. I have no reason to believe it will do so. Generic competition within the US appears more credible a long-term threat, e.g. Kroger or Publix brand soda, but this is a limited and lesser concern. More importantly, I simply do not see a lot of growth potential within the US market. Elsewhere in the developed world, there is room for growth but considerable challenges (e.g. politics in Western Europe, health concerns, changing tastes, limited success in juices, etc.).

On the negative side, KO's management has been less than stellar with excessive payments to top staff and an ineffective Board. The practice of moving debt down on to bottlers is not admirable and smacked of financial engineering.

KO's strengths make it a good candidate for LTBH, my preferred approach to investing. At close yesterday ($42.80/share) KO offered a 2.34% dividend yield and valuation at 15.8X EBITDA which look good to me when compared to a broad US index fund like VTSMX. The forward P/E of 18.8X seems so-so.

Any impressions on what price would be sensible to move into this stock? Any alternatives look much better to anyone else out there? We typically put our portfolio on autopilot when we do not see a compelling opportunity, meaning we dollar cost average into a mix of VTSMX and Vanguard's total international index funds when on autopilot. We hold 100% equities in our retirement portfolio, having a 10+ year expected time horizon before beginning retirement.

Feedback and ideas are welcome!

Cheers,

JohnH


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