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Better Buy: Berkshire Hathaway vs. Coca-Cola

By Dave Kovaleski - Updated Feb 19, 2020 at 8:29AM

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Is Coke it? Or is Berkshire Hathaway the way to go?

Coca-Cola (KO 1.26%)  and Berkshire Hathaway (BRK.B 0.42%) are two companies that need no introduction to most investors. We've all known Coke since we were kids, and most of us drink its products every day. And Berkshire Hathaway is run by the world's most famous investor, Warren Buffett. Both are well worth knowing -- but only one can be the better buy.

  

Lots of cash

Berkshire Hathaway started out as a textile manufacturer, but under Buffett's decades of direction, it has become a holding company for a powerful array of businesses and investments. Berkshire owns companies like GEICO, Duracell, and Fruit of the Loom, to name just a few, and it invests in others, like Apple, Bank of America, Kraft Heinz, American Express, and Coca-Cola itself. It's the fifth-largest company in the world, with a market cap of $555 billion.

The portfolio underperformed in 2019, returning 11% -- well below the S&P 500. It was the company's worst performance versus the market since 2009. While its largest holding, Apple, had a strong year and boosted performance, Kraft Heinz, another one of its largest holdings, was down 25%.

Berkshire's financial holdings, which make up about 46% of the portfolio -- the largest chunk -- were hurt by falling interest rates. Plus, the company has a huge amount of cash sitting on the sidelines -- about $130 billion, or roughly one-quarter of its market cap. In a year when the S&P 500 was up 29%, that uninvested cash was a drag on the return.

Cola being poured from a bottle into a glass.

Coca-Cola had a great fourth quarter. Image source: Getty Images.

The price is right?

Coca-Cola also underperformed the S&P 500 last year, returning 17%, but that stock has popped more than 7% so far in 2020 on some good fourth-quarter earnings. It saw organic revenue gain 7% in the quarter and 6% for the year, and reported its best market-share growth in a decade. The company is the largest in the very competitive non-alcoholic beverage space and has been able to slowly increase its market share during a time when there's been a move away from sugary drinks -- which include Coke's flagship products.

Operating income rose 19% for the quarter and 10% for the full year, while earnings per share jumped 134% in the quarter compared with the previous year's quarter and 38% to $2.07 for the full year. Coca-Cola Zero Sugar, along with its non-sparkling and juice products, including a premium juice offering with added vitamins, all buoyed revenue growth. As my colleague Greg Jones has explained, Coca-Cola has benefited from improved pricing relative to its peers and innovation. As Greg wrote, the company launched 600 new products in 2018, 250 of which were of the low- or no-sugar variety and 400 of which were non-sparkling drinks like juices, teas, and waters.

Better buy?

There's a lot to like about both of these stocks. If Warren Buffett is investing in Coca-Cola, then it's definitely a company you should consider. In the 2020 outlook, Coca-Cola company officials expect 5% growth in organic revenues and 8% growth in operating income with an EPS target of approximately $2.25 -- a 7% increase.

Berkshire Hathaway has an incredible track record, returning 20.5%  per year since Buffett took over in 1965. That's more than twice what the S&P 500 has returned. The company is coming off a down year but is sitting on more cash than it's ever had before. Buffett said last year that the company is looking to spend that cash on an "elephant-sized" investment and businesses that Berkshire Hathaway will permanently own. It didn't happen last year, but there's a good chance it will this year.

For long-term value, Berkshire Hathaway is the better buy. Buffett's long-term track record of performance makes this the right call. 

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short March 2020 $225 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$64.50 (1.26%) $0.80
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$302.82 (0.42%) $1.27
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$455,170.00 (0.55%) $2,472.75
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$36.25 (-0.14%) $0.05
Apple Inc. Stock Quote
Apple Inc.
AAPL
$173.19 (0.63%) $1.09
American Express Company Stock Quote
American Express Company
AXP
$165.40 (-0.27%) $0.44
Kraft Heinz Intermediate Corporation II Stock Quote
Kraft Heinz Intermediate Corporation II
KHC
$38.56 (-0.28%) $0.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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