The Global Franchise Business Warren Buffett Loves the Most
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Coca-Cola (NYSE: KO) just recently reported impressive quarter earnings results. It seems that KO is still a growth story. The global volume growth for the quarter was 4% and 5% year-to-date. The main area, which contributed to KO’s growth story, was Eurasia & Africa, with 11% growth in both this quarter and year-to-date, whereas the least growth area was Europe. North America stayed at 2% growth.
Its operating revenue for the third quarter was $12.34 billion, only 1% higher than the same period last year. Nevertheless, on the comparable currency basis, it rose 6%. A 12% decrease in interest expense and a 40% increase in equity income make KO’s EBT (Earnings Before Tax) stay at $3 billion, a growth of 5% compared to last year. The diluted EPS was $0.50 for the quarter, 4% higher than $0.48 EPS third quarter 2011. The company managed to improve its margins, due to higher case volume. Chairman and CEO Muhtar Kent said: “Importantly, we realized growth in the quarter across all five of our global geographic operating groups, despite continued volatility in the worldwide economy. We have been able to crack the calculus for growth in this environment. We have done this by consistently investing in our system and our brands to ensure that our global portfolio is more relevant and healthier today than it has ever been. We remain resolutely focused on ensuring that we leverage our wonderful heritage and fuse it with what is expected by our consumers today in order to earn and sustain our place in their daily lives tomorrow.”
As of September 2012, it had $14.9 billion cash, cash equivalents, and short-term investments, $12.38 in goodwill, and nearly $16.2 billion long-term debt. The stockholders’ equity was $33.6 billion. A 5.2% year-over-year increase in stockholders’ equity was due to 6.9% increase in retained earnings, and offset by a 9.28% increase in treasury stocks. KO had $34.2 billion in treasury stock now, the amount that is worth more than any publicly traded companies globally.
Indeed, KO is the best global franchise business in the world. In 2011, it had the market share of 41.9% whereas PepsiCo (NYSE: PEP) had only 29.9%. Compared to its competitor, overseas revenue accounted for around 70-75% of KO’s total revenue, whereas PepsiCo overseas revenue was around 50%. With the presence in emerging markets and strong distribution channel globally, it is hard for PepsiCo or any other soft drink companies to take away KO’s leadership in the marketplace. And that is why it is the business that Warren Buffett seems to love the most. He once said: “If you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I'd give it back to you and say it can't be done.”
Personally I would love to buy KO’s stock because it would allow me to sleep soundly every night; there is a high probability that the business will perform well even if the world experiences any economic turbulence. However, certainly, a great business like this will not be sold cheaply in the stock market. It is trading at 20.2x P/E, 5.3x P/B, and 17.6x P/CF. But as KO has a history of high valuations, it is quite rare to see single digit P/E valuation for the business.
It is quite interesting to note that Roberto Goizueta, CEO of KO in the 1980s, often showed an article when the question of “how much longer will it last” came up. It said: “Several times every year a weighty and serious investor looks long and with a profound respect at Coca-Cola's record but comes regretfully to the conclusion that he is looking too late." You might be surprised to know that the quote was in a Fortune article dated back as far as December 1938, nearly 75 years ago.
My Foolish bottom line
Personally, I think KO is a great stock to hold for the long term. We will definitely see KO keep being a growth story in the future, with the main revenues and profits coming from emerging parts of the world. A recent impressive earnings result gives investors more confident to buy and hold KO for their long-term portfolio, so that they can enjoy a good sleep at night.
hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend PepsiCo and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.