Coca-Cola (ticker: KO) was founded in 1892 and listed on the US stock market in 1919. The sugar-sweetened beverages it produces have become well-known sodas in the world. Unlike smaller rival PepsiCo (ticker: PEP), Coca-Cola has largely focused on soft drinks for a century after some failed attempts at diversification in the 1970s. Since then, it can be said that there has not been much change at all, which is rare in listed companies.
Business performance and valuation
|Annual revenue and growth rate ($ million)||38,655 +17.08%||79,474 +12.93%|
|Gross income and growth rate ($ million)||23,298 +18.98%||42,399 +9.91%|
|Operating income growth rate ($ million)||11,321 ＋13.32%||11,798 +7.88%|
|Net income and growth rate ($ million)||9,771 +26.13%||7,618 +6.99%|
|Market Capitalization ($ billion)||267.905||225.073|
|Stock performance in past 5 years (S&P 500 was＋65.13%)||+36.39%||+39.29%|
Disadvantages of investing in Coca-Cola
Only 20 years ago, peers PepsiCo’s were much smaller than Coca-Cola, but now Pepsi’s annual revenue is much larger than Coca-Cola’s, and its revenue in 2021 is only 48.64% of PepsiCo’s, less than half. Coca-Cola began to diversify its products fifty or sixty years ago, but now it has proved a complete failure. For half a century, random mergers and acquisitions spend like water, buying completely unrelated companies, without strategy or directions, and the management team has fallen into the “Institutional imperative – the good, bad, and ugly” pointed out by Buffett.
Please refer to my previous post “The significant valuation impact of diversity to listed companies” for explanation. “Business Diversity” is very important to large listed companies. It is not only related to the sustainable development of the company, but also affects the stock market valuation of the company. These have now been confirmed that Coca-Cola was totally failed in the past two decades.
Operating costs are too high
The company’s product line has been the same for a century, and the business is simple, but it still consumes a lot of operating costs. In the above table for the operating performance in 2021: the gross profit margin is still 60.27% (this is a good number, much higher than many technology companies), but the operating profit margin immediately drop to 29.29%, which shows that the operating cost is ridiculously high and consumes more than half of the gross profit! This is really difficult for most investors to agree with, because it is unreasonable from all aspects.
Therefore, this is also why many well-known investors (Musk is the latest one) often take Coca-Cola as an example, expressing that they want to buy out the company and lay off most of the non-production line personnel; especially marketing personnel, and gernal administration, so that the company’s performance can be immediately improved and shareholders are given their due.
Stock is too expensive, valuation is unreasonable
As can be seen from the valuation table above, Coca-Cola’s revenue in 2021 is only 48.64% of PepsiCo’s, less than half. But all of Coca-Cola’s valuation parameters are pretty much the same as PepsiCo. If we simply look at the general figure, the stock price is obviously unreasonable, or we directly say that the stock price is too expensive and unreasonable.
Unfavorable long-term holding
The product is already a sign of unhealthy, see my post “Coca-Cola has been inferior to Pepsi in and even return rate is negative in past 10 years!” The case of football superstar Cristiano Ronaldo mentioned in the article. The company is too big to fail, the only value is the company’s brand value, product diversification and business expansion remain in place, the organization is too large and inefficient, there are too many redundant staff, and the internal bureaucracy is rampant, hindering innovation and operational efficiency.
Advantages of investing in Coca-Cola
Multiple invisible moats
The formula of Coca-Cola is an unpublished trade secret, which has allowed its beverage taste and flavor to be loved by the public for hundreds of years. Another competitive advantage of Coca-Cola is that it is difficult for ordinary people to come out of its distribution channels. Coca-Cola has long had countless bottling plants all over the world, and many of these bottling merchants are also listed on stock markets around the world. In addition, it also has a global beverage distribution channel, relying on this unparalleled advantage to quickly grasp the global sales points and business opportunities.
Coca-Cola’s brand value has long been among the best in the world’s companies, which is an undeniable fact. Disney (ticker: DIS), Coca-Cola, McDonald’s (ticker: MCD), and Starbucks (ticker: SBUX) are all symbols of American culture, especially Coca-Cola. I take Coca-Cola Company as an example in sections 2-3 of my book “The Rules of Super Growth Stocks Investing” to illustrate the importance of the intangible value of the brand to a business.
Business is easy to understand
At present, the company only focuses on the soft drink business. There has not been much change since the company was established. Even kindergarten children understand the business of this company.
Coca-Cola is a typical company with a good and simple business, and its ability to operate a team has little impact. That’s why Buffett said in his testimony to the FCIC (Financial Crisis Inquiry Commission): “If you’ve got a good enough business, if you have a monopoly newspaper, if you have a network television station — I’m talking of the past — you know, your idiot nephew could run it. And if you’ve got a really good business, it doesn’t make any difference.”
In this regard, I would like to directly quote a paragraph of Buffett’s views on Coca-Cola investment to illustrate.
“If you ask me, if I put all my funds into a company and don’t move for 20 years, I would choose Procter & Gamble or Coca-Cola. In fact, Procter & Gamble’s product line is more diversified, but in comparison, I think Coca-Cola The certainty of Procter & Gamble is higher than that of Procter & Gamble. Procter & Gamble can be selected into the top 5% of my favorite companies. Procter & Gamble will not be defeated by competitors. Between music and music, I am more optimistic about Coca-Cola’s sales growth potential and pricing power.”
You will not lose everything
Dividends, buybacks, the stock price will rise slightly; these are the benefits of holding Coca-Cola stock for the long term. However, due to the stagnation of business, the chances of the stock price rising sharply are very low. As in another article of mine, please refer to my post “Coca-Cola has been inferior to Pepsi in and even return rate is negative in past 10 years!“, if inflation continues, it is impossible for you to have a satisfactory basic return in the long run. Not only is it impossible to beat the market, but even the worst case will be a negative return.
But one thing is certain, your invested principal will not be lost, and you can also have fixed cash dividends, which is absolutely safe for investors who do not want to buy ETFs tracking broader market, money markets, or bonds. It is suitable for an extremely conservative investment.
- “Coca-Cola has been inferior to Pepsi in and even return rate is negative in past 10 years!“
- “Pros and cons of investing in Coca-Cola“
- “Dividend-rich industries and 6 big differences from Taiwan”
- “Considerations as a dividends investor“
- “Why dividends disappeared suddenly these years?“
- “The most two serious killers to investors inflation and interest rate“
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