Please refer to the previous article (Part 1 of 2) before continuing as going forward I will assume that you have read the first.
For many long term investors there is maybe only a handful of companies that can say they are of as high quality as the Coca-Cola Company. For myself it was one of the first companies I ever learned about when I studied stocks in general. The stories I had heard of the wealth the company had created, the legendary dividend, the favorite business of a guy called Warren Buffet that everyone seemed to know about made me very curious. From being the first 10K/Annual Report I ever studied to leading me to the wonders of compound interest, I can say I owe Coca-Cola so much not just in dollars signs or non alcoholic beverages consumed, but in priceless amounts of information and knowledge it has given me. Whenever I study new principles or accounting methods I always use the Coca-Cola Company as one of my first test subjects. I apologize if the following article may seem too much of a love affair and biased in favor of Coca-Cola compared to the previous article. What follows is meant to demonstrate the qualities of a good business for an investor to look for, using the Coca-Cola Company as a real life example. (NOTE: From here on out I will use stock ticker symbols occasionally, it just is quicker sometimes) As The Coca-Cola Company (Ticker Symbol: KO)
was among the first companies I ever learned about I will use it as the first company I use to illustrate fundamentals.
What makes KO such a good long term investment? Is it the pretty letters? Is it Warren Buffet playing the stock? Is it just dumb luck? Well it's actually something much simpler than that...It's a GREAT business! Going back to the question I posed before about Apple I will ask the same question about Coca-Cola. "This year what does KO do to make money?" Coca Cola was started in 1886 selling its flagship brand Coke in Atlanta. Today the company sells over 500 different types of non alcoholic beverages across the globe to various companies. Everyone from Wal Mart, A&P, Kroger Supermarkets, McDonalds, Disney theme Parks, 7/11 convenience stores, Dollar Stores, gas stations, Amazon.com, carnivals and family get togethers everywhere you can always find a Coke product. So we can easily say that the company sells a range of non alcoholic beverages to make money.
Let's flash back to the same period we looked at Apple. Going back to 1996-97 what did KO do to make money? Despite a 15 year difference we can go back & take a look & realize the company FOR THE MOST PART sold the same things it sells today. So let's go back further.....
What did Coca-Cola do to make money 25 years ago? Non Alcoholic Beverages
What did Coca-Cola do to make money 40 years ago? Non Alcoholic Beverages
What did Coca-Cola do to make money 50 years ago? Non Alcoholic Beverages
What did Coca-Cola do to make money 75 years ago? Non Alcoholic Beverages
What did Coca-Cola do to make money 100 years ago? Non Alcoholic Beverages
KO has another great principle, The products it sells DON'T change!!!! Coca-cola, Sprite, Fanta, Dasani, Minute Maid all are made THE EXACT SAME WAY they have been for decades and centuries!! This means the company does not have to spend tons of money to constantly revamp its operations or come up with a new hit every year. IT SELLS THE SAME PRODUCT it has sold for decades, sure the packaging has changed but that's it! This only helps makes the costs inputs more predictable leading to the earnings being even more predictable.
I said before that some businesses have unique advantages. KO has several. The first and probably one of the most important is the brand loyalty. As Apple users know, the company has GREAT brand strength. It is very hard to get a iphone user to switch to Samsung. The same principle applies to Coca Cola. People are loyal to the brand and will ONLY drink Coke, Sprite etc.Try getting someone who drinks Coke to drink a Pepsi, (It's almost impossible in many cases). You cannot measure that type of brand strength in dollar terms. If Pepsi has a hard time getting people to switch than a total new comer will have a VERY hard time breaking into the industry as a whole. This protects the business market share. In order to get Coke to be shipped throughout the world, Coke uses it's independent, partially owned, and fully owned bottling companies. These bottlers are Cokes secret weapon, very similar to Apples ecosystem in a sense in that it is a unique aspect to the business that helps protect it. The bottlers have the scale, management and in depth understanding and network to distribute Coke year round under any conditions throughout the world. Even Pepsi does not have the scale or or effectiveness Coke's bottlers have. Many other businesses use Coke bottling network to distribute there product rather than try & compete against it because the thing is so darn effective it would be too hard to compete against (If you can't beat'em Join'em).
The input costs of a bottle of coke are extremely low, meaning that the company does not have high costs in producing the goods. (if you sell something at 1 dollar and it cost 55 cents to make it your costs are 55% of your profit). KO has very low costs, only requiring mainly sugar, water, and some metals.
The company is not a one trick pony that relies only on one area or one product for it's money. The company has a nice balance of not just soda, but water, tea, fruit juice, and MANY regional drinks across the globe. Many people will say at first glance will say Coke is not a good investment because sugary drinks are on the decline, again this is only a hollow-not going beneath the surface analysis of a company. What is popular to drink here is NOT the same as in Japan, Africa, Brazil, Italy, Turkey and elsewhere as Coke has realized throughout the decades. That is why they own so many regional brands that they only sell in certain areas. They will also always miss the low input costs, global diversification, brand loyalty, and portfolio diversification at Cokes disposal.
Coca-Cola is also blessed with a very smart management, perhaps not Steve Jobs type management but easily top quality, all you have to do is compare KO's balance sheets to that of some of it's competitors, you will quickly realize using some traditional financial ratios KO is superior financially in every 8 out of 10 tests. Smart management is good, something that both Apple & Coke posses (Even without Steve Jobs, management is not stupid by any stretch). But there is one thing that Apple does not have & has proven in the past it does not compared to Coke....
ANY IDIOT CAN RUN COKE!! Minus the last few years under the current CEO Coke was run by VERY sub-par management for over a decade. Yet the business kept humming along, each selling more soda than the year before basically taking care of itself. In other words...the company basically can take care of itself...and take a lot of abuse without hurting the profits!! A business like Procter & Gamble which has had bad/sub par management for almost 20 years has not hurt the company because any idiot can run it! P&G & Coke do not require geniuses to run them they can run themselves, that the sign of a great business. Apple does not enjoy that luxury, back in the 90's a key reason why Apple was doing terrible is because it was run by a terrible, absolutely terrible management that ran a business that could not take that kind of abuse. Only under the return of Steve Jobs a once in a lifetime type CEO of Henry Ford, Thomas Edison type intellect did Apple turn around. If Apple's management can remain above par, than they should do fine, however if a management of the 90's were to ever return, the company may go the way of pets.com. (NOTE: For further research into terrible management: See Ron Johnson/ JC Penney).
And finally there's the dividend, which is one of the main reasons that people own Coca-Cola - For 53 years running KO has paid a increasing dividend. One of the longest streaks of any company on record. The dividend can keep growing every year simply because Coca-Cola sells more beverages & raises the price than the year before. (In the simplest terms). This results in a increased dividend. Just to compare - Apple pays a dividend as well - but the dividend has only been raised 3 years in a row, & has history of being infrequent. The dividend was halted in 1995 - A roughly 15 year period of no dividend at all. Granted - The 2 are COMPLETELY different businesses, but it illustrates yet again why you cannot retire on Apple's dividend the same way you could on Coca-Cola's. Too many people have already made the mistake of calling Apple's dividend a legend in the making, even going so far as saying someday they will be a "Dividend Champion" (Meaning 25 years or more of increased Dividends each year). This again totally ignores the companies history, & the nature of the business. I know many working couples who have made Apple's dividend the cornerstone of there portfolio for retiring 20 years from now, this is a recipe for disaster.
Am I telling you to dump all your Apple stock because the company will surely be on it's way back to the late 90's someday? NO NO & NO! Am I telling you to go buy nothing but Coca-Cola for the rest of your life? No! NO! No! If this is the conclusion you reach by reading this article you have totally missed the point & if so stocks are probably not the best thing for you to invest in. The point is just to demonstrate that while a company may have a good product and a good business doe not make it a automatic candidate for a long term investment. (Even for KO - you always need to check up on it) You cannot just universally assume a company will stay on top forever, you cannot ignore a companies history, and you most certainly cannot ignore analyzing where the profits come from. If there is anything to ignore - Ignore the euphoria, ignore the crowd, and ignore your own first hand assumptions without taking a look into things yourself. The philosophy of Peter Lynch comes to mind - No matter what happens - Good Companies will do good & Bad Companies will do bad & the stockholders over the long term will be rewarded accordingly.
No comments:
Post a Comment