Analyzing Coke (KO)- A Warren Buffet Portfolio Holding

By Yaser Anwar, CSC of Equity Investment Ideas

I’ve recently agreed to be a guest author for the excellent Stock Pickr as I believe it has added value to my investing and trading. Hence I’m going to try and analyze the whole Warren Buffet portfolio at SP over the coming weeks/months. As always I pledge to provide excellent value to my readers through crafting essential partnerships that would help you.

• KO’s business encompasses the production and sale of soft drink and non-carbonated beverage concentrates and syrups. These products are sold to the KO’s authorized independent and company-owned bottling/canning operations, and fountain wholesalers.
• In the long run, complete alignment of KO and its bottlers is a winning strategy. The highest probability of success for KO & the bottlers is an aggressive strategy which rapidly fills the voids in the portfolio.
• I believe KO is gradually changing its product portfolio and business practices, as CEO Isdell has brought in new management to reinvigorate KO. Looking forward, KO must also leverage the depth of its global reach and dominance, while tailoring retailer based strategies designed to drive maximum marginal utility for customers.
• In my view, KO can drive category growth rates to new levels and redefine its own sustainable volume growth model by following such a strategy. KO’s early efforts, while not incredibly revolutionary, may reap impressive results.
• KO is well positioned in key emerging markets such as China, Brazil, Russia, Turkey and Argentina. In 06, these emerging markets recorded strong double digit growth in volumes. I expect KO would continue to benefit from the underlying growth in the consumption of soft drinks in these markets.
• The recent news flow has been positive and the business generally is improving. Even so, performance in markets representing 40% of profit is likely to be sub-par in 07, limiting core concentrate business profit growth to 4-5% versus a 6% long-term objective."
• Analyst estimates see net sales rising about 5% in 07, reflecting higher worldwide volumes and higher net prices. Volume growth should benefit from new products and increased marketing spending.
• KO’s Japan division has gotten better, but weather helped and Georgia Coffee is still tracking down 5%-6%. The Street believes single digit bottler price increases could result in a -1% 2007 US volume decline, which coupled with a $100 million orange cost step-up, could limit US profit growth next year.
• Recently KO has made the necessary initial monetary investment to begin to grow its global beverage portfolio. The company’s $400 million expansion of its marketing base ($125 million in the US) was a sign that the company is willing to spend money to make money which The Street views as positive.
• Recent analyst earnings forecasts for KO have shown no change which indicates little variation in expected earnings growth. Relative to changes in earnings forecasts for other companies KO compares favorably.

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