Warren Buffett’s Berkshire Hathaway’s largest 13F holding by market value at the end of September- as it has been for some time- was The Coca-Cola Company (NYSE:KO) with the holding company owning 400 million shares of the global beverage brand. That stake was worth over $15 billion at the time (see more of Buffett's favorite stocks). Coca-Cola is often given as a classic example of Buffett’s “moat” value-add to the value investing tradition: find a company which isn’t only priced attractively, but also has a sustainable competitive advantage that will prevent other companies from breaking into its market. Coke’s brand- and, more importantly, its trade secret formula- provide that moat.
Berkshire, as might be expected, had the largest position in The Coca-Cola Company out of the investors that we track in our database of 13F filings; however, we recorded some other large holders of the stock as well. The Bill & Melinda Gates Foundation Trust owned over 23 million shares, making Coca-Cola one of its top three stock picks behind McDonalds and Berkshire Hathaway itself. Find more stocks the trust is invested in. Billionaire Ken Fisher’s Fisher Asset Management and Boykin Curry’s Eagle Capital Management also had over $350 million invested in the stock. Check out more stock picks from Ken Fisher and from Eagle Capital Management.
Coca-Cola’s revenue was about flat in the third quarter of 2012 compared to the same period in the previous year. Higher revenue in North America was partially offset by weaker performance in Europe and a slight decline in the Pacific geography. Margins were up slightly, but not by much and so net income showed a light increase as well. Overall in the first nine months of the year earnings per share came in at $1.56 as opposed to $1.49 a year earlier.
With these recent results and a market cap of $166 billion, The Coca-Cola Company trades at 19 times trailing earnings. It’s certainly the case that the company still has its moat and its brand name, but even with those advantages it doesn’t stand out as a cheap stock at that pricing. Analyst expectations are for slight growth in 2013, and these figures imply a P/E of 17. Coca-Cola is also notable as a common example of a defensive, consumer staple stock, and its beta is a fairly low 0.4.
How does Coca-Cola compare to its peers?
We would compare Coca-Cola to PepsiCo, Inc. (NYSE:PEP), Dr Pepper Snapple Group Inc. (NYSE:DPS), energy drink provider Monster Beverage Corp (NASDAQ:MNST), and Cott Corporation (NYSE:COT). Pepsi is often considered the closest peer in terms of brand, but much of its product line includes snacks and other foods. Its earnings multiples are very similar to Coca-Cola’s: 19 times trailing earnings, 16 times consensus for 2013. However, Pepsi actually experienced declines in revenue and earnings in its most recent quarterly report compared to the same period in the previous year.
Dr. Pepper Snapple carries a slight discount to the market leaders in the beverage industry, as might be expected; for example, its trailing P/E is 16. The company had been reporting substantial earnings growth, but its sales figures have been flat and so further improvements might not be sustainable. Monster and Cott are more priced for growth, with earnings multiples in the 24-28 range; oddly, this is the case even though Monster’s recent earnings performance has been about in line with that of Coca-Cola or Dr. Pepper Snapple while Cott actually had a weaker bottom line in Q3 2012 than in the third quarter of 2011. These two stocks should certainly be avoided from our point of view.
Coca-Cola, Pepsi, and Dr. Pepper Snapple actually don’t look too attractive either. They are not easy value cases, and their businesses have not been doing particularly well. We wouldn’t make them targets for selling- they are probably good long term holds- but we’d advise against buying at this time.