Berkshire Hathaway
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By hartmanbirge
May 23, 2005

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Thanks for the plug... To begin I will say that there are many EXTREMELY intelligent folks on this board who will be inclined to disagree with me so you'll have to put any opinion I have in its proper context. I'm just an individual investor who's doing this on his own so take that for what it's worth as well - my priorities may differ because of this not insignificant fact. That said, all I can do is tell you what I think of the company and I'll have to leave the trigger decision to you. I began purchasing Coke this year at around $41-42 a share so that was my entry point. Since then it's gone up a bit so it's a tad bit more priced. As an individual what I seek is one-shot one-kill opportunities where I can spot a great company and target that same company through the rest of my investment life - I may buy Coke this year...maybe next...maybe ten years from now etc. but I want any company I choose to last my lifetime - As an example, at various points I have purchased Berkshire Hathaway every year for the past five years. I have identified my great companies and I just wait until they're attractive - then I pull the trigger. This accommodates my individual circumstance where I have cash coming in every year that needs my attention and blindly throwing it at an index I personally find unthinkable (wouldn't fit my personality)....

The bulk of my focus and research goes into identifying why I think a company will adapt, thrive, and dominate over time. That's my focus. Once I figure that out then I just have to wait for the right price...I compare price to the bond yields available at the time and if the company's yield is equal or greater then I'm probably inclined to pull the trigger. Coke is a GREAT company however so I am virtually CERTAIN that its "coupon" will rise over time... so I'm essentially looking to buy a coupon that will rise in value at a rate that exceeds inflation. If you can buy it at the bond equivalency then you should come out ahead. If you buy below bond equivalency then you're really in good. If Coke were selling for a PE of 15 then I'd back up the truck as they say. Buffett bought it at a PE of 12 back in the day and put 30% (as I recall) of BRK into KO. I think that this strategy is only suitable for the "boring" businesses with the long track records as one can more easily extrapolate their earnings into the future with greater certainty. Coke's yield at the moment is comparable to the bond...rough equivalency... which would you rather have? At these levels you should do OK with a yield slightly less than 5% that is growing. But I might also add that there are also other attractive opportunities....McDonalds, Budweiser, Wal Mart etc. are just the sort of dominant franchises that should do well over the coming decades because they mint cash and plow it back into the business or back to shareholders. Who's going to knock them off their respective hill? Remember three years ago when BK was the rage? Look at what McDonalds has done with their dominant position to kick their ass - all it took was a little time and MCD could just sit there and try a, b, c, d until they hit it right. That said, Coke is also doing a lot of things right under Isdell... they're a lot smarter with capital allocation for starters. He's improving their management depth and attacking the morale problems...major focus on people. Read "Good to Great" and I think it's hard to come away from that book not thinking of Isdell. Understated, hard-nosed, aggressive, blunt - everything you could want in a CEO. Below is a bit of a post I wrote on the KO board ref their growth prospects because I think if one examines the disconnect between the company and the Street that it is growth that is the big worry.... I for one think that growth is WAY overrated - I'll take the cash flow because it's far more certain...3% case volume growth, plus a 2.5% dividend yield, plus 1.5% share buybacks = 7% growth by not doing much other than standing still.... I think that's your worst case. Would you buy a 5% bond growing indefinitely at 7%?! I sure as heck would.

And of those growth prospects...

"The world consists of 6 billion people give or take correct? The U.S. consists of about 300 million give or take. So in essence the global population is greater than the US population by a factor of TWENTY times. And if the world's population grows a bit than add a few more factors. About 80% of Coke's revenues come from abroad, which means that the company has logistics and infrastructure penetration into a sizeable chunk of the world consumer market. All else being equal the size of Coke's US portion should be 1/20th instead of the 1/5th that it is. Will the world's consumer drink the prodigious amounts of us Americans anytime soon? No. Does that spoil the thesis? Not really. If the US market were to remain completely stagnant the company still has a global market that presents a MASSIVE opportunity for the next fifty-to-one hundred or so years. The company could double in size through volume growth alone by several times just by penetrating and distributing a range of products that are fairly simple. But that's not the whole story.

The joys of robust and certain cash flow. The company is going to buy back a TON of shares, which will increase earnings per share well above the organic growth rate. The company is going to continue to issue and increase its stream of dividends. The company is going to refocus on its great brand. The company is going to develop new products to increase growth in even saturated markets like North America. The company is going to reinvest capital into a business that generates great returns on that capital. Even if a few things in this thesis are off it's not going to be enough to stop it. If you buy Coke shares today you're practically guaranteed to make money in the future - not a moon shot.... but a high degree of certainty. It's not that complex and it doesn't take a rocket scientist to figure this out yet so many will pass. They will go for the moon shot and pass up the certain guarantee as if they can't help themselves. They will point to 2% revenue growth and get all alarmed that the company is in a saturated and slow-growth situation. To do so is to miss the entire thesis of the company and its great and certain future prospects. Look at all the problems they've had since Gouizetta - a veritable nightmare of mismanagement and bungled business ideas.... yet here sits Coke - sitting atop the world's greatest distribution network with the world's most powerful brand (perhaps next to Marlborough)...still minting money like crazy... buying back shares... increasing shareholder value... chugging along. And now insert a hard-nosed realist like Isdell into the picture. All evidence suggests a competent and focused CEO who is driven to bring the company back. I wouldn't give Coke up for dead by any stretch...."


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