Branding the Bubbles

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The largest holding in the Berkshire Hathaway (NYSE: BRK-A) portfolio managed by investing titan Warren Buffet is Coca-Cola (NYSE: KO).  Over the years Buffet has amassed $15.7 billion dollars in Coca-Cola shares, representing an 8.9% stake in the iconic blue chip. But Buffet isn’t the only one who believes in Coca-Cola; 67.33% of the company is institutionally owned. The top five holders are Berkshire Hathaway, Vanguard Group, Fidelity Investments, BlackRock Institutional Trust, and SunTrust Banks.

In mid-2012 Coca-Cola shares reached a 52-week high of about $77 a few days after announcing yet another solid quarterly performance in the company’s long and varied history.  However, following a pre-announced 2-for-1 stock split in mid-August, the share price has dropped around 4%.

Stock splits as catalyst

Stock splits sometimes act as catalysts for stock price movement, but Coke’s most recent split has yet to make shares move substantially one way or the other. However, past history tells us this could be a chance for new investors to climb on board.  The last split was in 1996 and the share price after the split on May 13th of that year was $43.  The year-end closing price for KO was $52.63; an increase of more than 20%.

Constant development

Coke has a history of responding to changing tastes with additions to its product line, some through acquisition and some organically.  From PowerAde to Coke Zero, the company has not been content to rest on the strength of the more than 100 year old flagship product.  Today, Coke has 15 “billion dollar” brands with over 500 global brands.  Coke reaches consumers in a staggering 206 countries through about 3,500 brands.  Latest efforts include increasing penetration in health-related offerings.

Company run by a very strong management

A hallmark of level-headed management is the willingness to restructure in order to meet demand.  Coke CEO Muhtar Kent has listened to concerns from the company’s regional leadership about excessive bureaucracy.  Right now Coke is working to streamline reporting lines to maximize efficiency.  Coca-Cola has three operating segments – Coca-Cola International, Coca-Cola Americas, and the Bottling Investment Group.  In a bold move, it appears that the company is going to push leadership for global operations into the Bottling group.  The shake-up should improve Coke’s bottom line going forward.

Equity to Debt Ratio is almost zero

Coca-Cola’s debt to equity ratio of 99.55%, looks bleak until you compare its numbers to its major competitors.  We also need to consider total debt and total cash on hand, which for Coke is $32.4 billion in debt with $16.97 billion in total cash.  Dr Pepper Snapple Group (NYSE: DPS) has a debt to equity ratio of 118% with $2.72 billion in debt and only $312 million total cash.  PepsiCo (NYSE: PEP) has a debt to equity ratio of 138% with $28.3 billion in debt with $4.19 billion total cash.

Consistent increasing in earning

Coke’s earnings have bounced a bit over the last five quarters, but the most recent quarterly announcement of $0.62 in EPS showed significant improvement over the previous quarter’s $0.46, and beat the year over year EPS of $0.61.

Relative performance to peers

Many investors favor Return on Equity as a key metric, and on this indicator Coca-Cola’s performance is in line with peer comparisons.  Coke has an ROE of 25.8%, while rival Dr. Pepper Snapple comes in slightly better at 25.91%, and PepsiCo leads the trio with an ROE of 26.9%. However, in an industry where operating margins are critical, Coke leads the pack with a margin of 23% compared, to 17% for Dr. Pepper Snapple Group and 13.8% for PepsiCo.

It’s all about branding

Coke is actually a branding story. The people at The Coca-Cola Company are masters at building brand recognition. The company reigned supreme in Interbrand’s annual ranking of the world’s most valuable brands since it began producing the list in 2001.  To put Coke’s brand strength in perspective, Interbrand says the Coke band is more valuable than McDonald’s and Disney combined.

More and more investing experts are pointing to American companies with global exposure as the place to be.  If you buy that advice, it is hard to imagine a company better positioned than Coca-Cola, with a diversified product line and exposure to more than 200 countries around the world. With all the feathers in its cap, Coke is definitely a buy for long term investors.


SomnathGuha 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.

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