[October 2024] Warren Buffett's favorite, how is coca-cola's performance?

There are many well-known listed companies in the US stock market, $Coca-Cola (KO.US)$ is one of them. This company, founded in the last century, has been listed on the US stock market for over 100 years, and the stock price has increased tens of thousands of times since going public.

Coca-Cola's long-term stable operation has also attracted the attention of many institutional investors, including Warren Buffett. From 1988 to 1989, Buffett's Berkshire Hathaway successively bought about $1 billion worth of Coca-Cola stocks, directly becoming Berkshire's largest holding at the time, and has held it ever since. It remains Berkshire's fourth largest holding today.

On October 23rd, Coca-Cola will release its latest performance. Every time the company releases its performance, it may also imply a good trading or investment opportunity. Before this, investors need to understand how to interpret its performance.

Can Coca-Cola's steady performance continue? What aspects should we focus on in terms of performance? Let's mainly focus on 3 key points: operational stability, brand moat, and dividends and buybacks.

1. Operational Stability

Buffett once said, the best businesses are those that, in the long term, require no further massive capital injections but can maintain a stable high return rate. This is a measure of operational stability.

Coca-Cola's business model is very simple, mainly producing beverage concentrates and selling them to bottling plants, as well as conducting marketing and brand promotion. The specific processes of canned production and transportation are handled by cooperating bottling plants, requiring minimal capital investment. Coca-Cola's brand influence is extremely strong, allowing the company to maintain very high profit margin levels.

Before Buffett's purchase, Coca-Cola had maintained growth for decades. Today, Coca-Cola has lost its high growth but its operational stability continues. In terms of this, we can observe several indicators from the performance.

First, the stability of performance. Compared to ten years ago, coca-cola's revenue has declined slightly, while net income has increased slightly. During this period, apart from some one-time factors, coca-cola's performance has fluctuated little most of the time, with ups and downs.

Second, the stability of profitability. Mainly looking at gross margin, net profit margin, and return on equity (ROE). Let's take a look at the data from the past five years.

Looking at the gross margin, coca-cola's gross margin has remained around 60% most of the time, very stable overall.

In terms of net profit margin, coca-cola's net profit margin has been stable between 22% and 25% most of the time.

Looking at return on equity, starting from 2019, coca-cola's ROE has been maintained at a high level between 40% and 50%.

Third, the stability of operational capabilities. Mainly observing accounts receivable turnover and inventory turnover as indicators.

In terms of accounts receivable turnover, coca-cola's indicator has shown a slight increase in the past five years, reaching around 13.3 times in 2023.

Looking at inventory turnover, coca-cola has maintained a stable state at around 4-5 times over the past 5 years.

Overall, Coca-Cola has maintained a relatively stable operation in the past four to five years, whether it is revenue growth, profitability, or operational capabilities, the performance in revenue has been relatively stable. Therefore, we may not expect Coca-Cola to have a major breakthrough in revenue in the future, observing its ability to maintain stability will suffice.

2. Brand Moat.

So, what is the secret behind Coca-Cola's steady operation for over a hundred years? Its brand moat cannot be ignored.

Coca-Cola owns a wide range of beverage brands including Sprite, Fanta, Minute Maid, and more, but the core remains Coca-Cola, the world's largest cola brand.

Coca-Cola is sold in over 200 countries globally, establishing a very deep brand image in consumers' minds. Buffett once said, if someone gave me $100 billion to defeat Coca-Cola and become the new leader in the global beverage industry, I couldn't do it. It is evident that in Buffett's eyes, Coca-Cola's brand moat is nearly impregnable.

So, how can we evaluate whether Coca-Cola's brand moat is solid? Perhaps we can refer to an indicator: advertising spending/revenue. The lower this indicator, the stronger its brand influence may be. This implies that with a strong brand influence, the company may only need a small amount of advertising spending to capture consumers' hearts and wallets, thereby driving revenue growth.

Let's observe Coca-Cola's advertising spending/revenue indicator over a longer period. We see that this indicator was maintained at around 10% nearly 20 years ago, in 2004. By 2011, Coca-Cola's revenue had doubled compared to 2004, and this indicator had decreased to about 7%.

Starting from 2014, as Coca-Cola's revenue began to decline, perhaps indicating a decrease in brand influence, Coca-Cola increased advertising promotions to boost brand visibility. This indicator climbed all the way to nearly 13% in 2018. In recent years, as Coca-Cola's revenue returned to a steady growth path, this indicator has returned to around 10%.

Looking at the data from the past 20 years, for coca-cola, the indicator of advertising expenses/revenue around 10% may be a relatively neutral level. We can continue to observe this indicator data in its subsequent performance. If it exceeds 10% by too much, it may indicate a weakening of its brand moat.

3. Dividends and Buybacks

Coca-Cola primarily operates with light assets and does not require much capital expenditure, so what is the money earned used for each year? In the US stock market, a very common practice among listed companies is to use excess cash for dividends and buybacks.

Through buybacks and dividends, the company can reward shareholders, increase the company's return on net assets and earnings per share, and inject additional liquidity into the market, which can be said to be a win-win situation.

And in terms of buybacks and dividends, looking at the data, Coca-Cola can be said to be extremely generous. Taking the last decade as an example, Coca-Cola's total net income is approximately $83.9 billion, while the total amount of dividends and net buybacks (decrease in share capital-increase in share capital) amounts to a high $86.3 billion, even exceeding net income. The total dividend amount is approximately $71.8 billion, and the dividend yield has remained at around 3% per year.

Although the situation where dividends and buybacks are more than net income is unlikely to continue, the scale of Coca-Cola's shareholder rewards is indeed relatively rare in the entire US stock market, with dividends and buybacks as a percentage of net income exceeding 80% most of the time. This may also be an important reason for its stock price rise in most years from 2013 to 2023.

In future financial reports, we can still continue to focus on the proportion of Coca-Cola's dividends and buybacks in relation to net income, to see if it can maintain its historical performance of rewarding shareholders.

Having read this far, you may have some new insights on how to interpret coca-cola's performance. It is worth mentioning that each time a star company announces its performance, it may mean a rare trading opportunity for different types of investors.

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Conversely, if investors believe that the latest performance of a certain company will not be optimistic and will bring pressure on the short-term stock price, investors may consider short selling, which can be done by considering margin selling or buying put options.

Of course, if investors feel uncertain about the bullish or bearish direction of a company's performance, but the stock price may experience significant upward or downward volatility after the performance announcement, investors may consider capturing potential opportunities by trading the volatility of its stock price, considering employing a straddle strategy by purchasing both call and put options simultaneously.

Finally, to summarize,

Coca-Cola's past operational performance has been very stable. We can continue to monitor the company's performance fluctuations, profitability, and operational capabilities to observe if it can continue to maintain steady operations.

Coca-Cola's brand moat is the key to its past stable performance. We can measure the stability of its brand influence by observing the indicator of advertising expenses/revenue.

Coca-Cola has been very generous in dividends and rewards over the past decade. We can continue to pay attention to whether the company can maintain the willingness to generously reward shareholders in the future.

Every time a company releases its earnings, it may bring potential trading opportunities. Investors can consider suitable types of trades based on their individual risk tolerance.