In 1988, Warren Buffett stunned the financial world when he purchased 94 million shares of Coca Cola. No other financial guru saw this as a good investment. Buffett acquired 93.4 million share, for a total investment of $1.023 billion. By the end of 1989, Coca Cola represented 35 percent of Berkshire common stock portfolio. It was a bold move. What caused Buffett to purchase? There was no distressed pricing. But rather, according to Buffet, the company was undervalued. The market felt the company value was $15.1 BILLION. He felt it was worth anywhere from $20.7 billion (based on a 5 percent growth in owner earnings) to $48.3 billion (based on a 15 percent growth). So, like Benjamin Graham, Buffett felt there was a huge margin of safety-the discount of intrinsic value. This ranged from a conservative low of 27 percent to a high 70 percent. Other investment gurus looked at Coke as overvalued. By 2008, Buffets investment in coca cola has grown considerably. He owns 8.6 % of the company, and it is worth 12.274 billion dollars. But would Buffett buy it today if he was considering it for investment? Or would he buy its rival, Pepsi Cola? Let us take a closer look. Background Coke, symbol KO NYSE, is the worlds largest manufacturer, marketer, and distributor of carbonated drink concentrates and syrups. It began in 1986 and is now sold in more than 195 countries worldwide. Originally intended as a patent medicine when it was invented in the late 19th century by John Stith Pemberton, coca-cola was bought out by businessman Asa Griggs Candler, whose marketing tactics led Coke to its dominance of the world soft drink market throughout the 20th century. The Coca-Cola Company makes Coca Cola and Diet Coke, which has become a major diet cola. However, others exist, including caffeine-free coca-cola, diet coke caffeine-free, cherry coke, coca-cola zero, vanilla coke and special editions with lemon and with lime and even with coffee. Pepsi symbol PEP NYSE was first made in the 1890s by pharmacist Caleb Bradham in New Bern, North Carolina. The brand was trademarked on June 16, 1903. There have been many Pepsi variants produced over the years since 1903, including diet pepsi, crystal pepsi, pepsi twist, pepsi max, pepsi samba, pepsi blue, pepsi gold, pepsi holiday spice, pepsi jazz, pepsi x -available in Finland and Brazil, pepsi next-(available in Japan and South Korea, pepsi raw, pepsi retro in Mexico, pepsi one, and pepsi ice cucumber in Japan. It also makes and sells frito lay products. According to consumer reports, in the 1970s, the rivalry continued to heat up the market. pepsi conducted blind taste tests in stores, in what was called the "pepsi challenge". These tests suggested that more consumers preferred the taste of Pepsi (which is believed to have more lemon oil, less orange oil, and uses vanillin rather than vanilla) to coke. The sales of pepsi started to climb, and Pepsi kicked off the "challenge" across the nation. In the U.S., pepsi's total market share was about 31.7 percent in 2004, while coke's was about 43.1 percent. Overall, coca-cola continues to outsell Pepsi in almost all areas of the world. Saudi Arabia, Pakistan, the Canadian provinces of Quebec and Prince Edward Island and the U.S. states of Michigan and South Carolina are the exceptions. So let us begin our evaluation, through Warren Buffet eyes. Are coke and pepsi crrently buffet type companies? A basic principle for Buffett is that his type of company has a "durable competitive advantage" as compared to being a "price competitive" or "commodity" type of business. Companies with a "durable competitive advantage" are more likely to be found in these sub-industries: brand name fast food restaurants, brand name beverages, brand name foods, brand name toiletries and household products, brand name clothing, brand name prescription drugs, advertising, advertising agencies, TV, newspapers, magazines, direct mail, repetitive services for businesses, low cost producers of insurance, furniture, or low cost retailers. While you should be easily able to explain where the company's pricing power comes from -i.e. a strong regional brand image, a business tollgate, its main products are #1 or # 2 in its field and has been on the market for years and hasn't changed at all, a consumer or business ends up buying the same product many times in a year, etc. or having the lowest production cost among its competition- there are certain figures that one can look at that can qualify the company as having a durable competitive advantage. Both of These Are Buffett type companies. Copyright (c) 2008 Barry Lycka
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