Coca-Cola (NYSE:KO) has been one of Warren Buffett-led Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) largest stock holdings for a long time. Buffett has praised Coca-Cola's competitive advantages, its ease of operations, and the company's potential to grow even further. So should investors buy shares of Coca-Cola, or would investing in the beverage giant indirectly through Berkshire Hathaway be a better idea?
Coca-Cola's competitive advantages
It's easy to see why investors might want to own Coca-Cola. The company has one of the most recognizable and valuable brand names in the world, which not only helps the company's products move off the shelves, but also gives it pricing power over its rivals.
In addition, the company has one of the most impressive and efficient distribution networks of any in the world. Finally, Coca-Cola has a rock-solid balance sheet and excellent cash flow, which gives it the financial flexibility to invest and grow as management sees fit.
Don't worry too much about Coca-Cola's recent headwinds
Coca-Cola did post some disappointing results in its last quarterly report. Revenue fell 5% year over year, and the company cut its organic revenue growth forecast for the year, as well as its full-year earnings guidance.
However, a lot of this was due to foreign exchange headwinds and refranchising efforts, as well as macroeconomic conditions in places such as China, Argentina, and Venezuela. Also, despite the public's perception, sparkling beverages remain the top growth driver of the global nonalcoholic ready-to-drink beverage industry.
Finally, Coca-Cola has been aggressively growing its product offerings to keep up with consumers' tastes, a trend I see continuing. Nearly one-third of Coca-Cola's business now comes from non-carbonated drinks, up from 10% in 2000. In fact, Coca-Cola has grown into the No. 1 still-beverage company in the world.
The point is that Coca-Cola's business has faced challenges, but most are temporary issues. Coca-Cola's core business of selling beverages is alive and well.
With Berkshire, you get all of this stuff, too...
When you invest in Berkshire, you get a piece of the company's $17.4 billion Coca-Cola stake, and you also get exposure to Berkshire's large stock positions in American Express, IBM, Wells Fargo, and dozens of other companies.
In addition, you get a piece of all 61 of Berkshire's wholly owned subsidiaries that operate in a diverse variety of industries. Just to name a few of the best-known, Berkshire Hathaway owns 100% of Geico, BNSF Railroad, Fruit of the Loom, Duracell, NetJets, and The Pampered Chef.
The point is that buying Berkshire Hathaway is like buying a well-diversified portfolio all in one stock. And you'll have Warren Buffett and his trusted investment managers adding to the already impressive list over time.
A look at each company's valuation
Coca-Cola is projected to earn $1.91 per share in 2016, meaning that it trades for 22.8 times this year's expected earnings. Sure, investors are generally willing to pay a premium for a business as stable as Coca-Cola's and also willing to pay extra for Coca-Cola's relatively high and consistently growing dividend, but at a glance, Coca-Cola looks rather pricey.
Berkshire Hathaway, on the other hand, trades for 20.8 times 2016's expected earnings, substantially less than Coca-Cola. And the company is expected to generate earnings growth of nearly 10% in 2017, compared with just 5.2% for Coca-Cola.
So on a valuation basis, Berkshire Hathaway is the more appealing of the two right now.
Future growth potential
Coca-Cola still has significant room to grow. The company has lots of potential to expand the reach of its products internationally, particularly into emerging markets. Its current refranchising of its U.S. bottling system could result in higher margins. And the company most likely will continue to add to its portfolio of brands to adopt to consumers' changing tastes.
Berkshire will continue to grow through acquisitions, stock price appreciation, and growth of its wholly owned subsidiaries. The company currently has a $72 billion war chest of cash it could put to work, as well as the credit to borrow whatever it wants, cheaply. Buffett recently warned that the company won't be able to replicate its phenomenal returns of the past 50 years -- the company is simply getting too big to sustain 20%-plus annual growth rates. However, the acquisition-oriented nature of the business does create nearly unlimited growth potential for Berkshire over the long run.
Coca-Cola is a great business. That's why Buffett has said many times that Berkshire has no intention of selling a single share of its massive stake in the soft-drink giant. However, Berkshire Hathaway simply looks like a much better deal right now, and I can't think of anyone I'd rather make decisions with my investment dollars than Warren Buffett and his team.