Time to KO Coke?

Every year one has to ask, is this the time to sell Coke?

I never bought it at a cheap price back in Q2 2011, and its yield as ‘equity bond’ (see below) is only in the realms of 5%. It is not growing its revenues particularly fast and it has moved in to owning its bottling operations in the US, which are lower margin and more capital intensive than the selling of concentrates and syrups. There is also the looming spectre of California’s ‘Proposition 65’, which requires that a warning appear on any product that contains a substance that in the view of California causes cancer or birth defects, which could have caused reverberating damage to Coke’s trump card; it’s brand.

However, Coke has now removed 4-methylimidazole from its recipe in order to remove the risk to its gold plated brand, and from any angle that one analyses the stock it is the Rolls Royce of equities. Gross margins are consistently 60%+, net earnings are consistently approx 20%, long-term debt could be paid off with just 0.4 years operating earnings and the company is constantly ‘eating itself’ with stock buybacks.

Consumer tastes are evolving and Coke is having to make strategic acquisitions of local brands to ensure global market penetration, but the fact remains that Coke retains four of the world’s five top selling non-alchoholic beverage brands; Coke, Diet Coke, Fanta and Sprite. Only Pepsi would think of challenging these and they long ago learned the lesson that doing so does them more harm than good.

Therefore how can you sell it? Coke will still be in a position of dominance in twenty years within a vastly expanded global consumer market to serve. I’ll drink to that.

Let’s here is from the man himself: Buffet on Coke

The author is long KO.

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