Berkshire Gains as Buffett’s Coca-Cola Stake Rallies

Berkshire Gains as Buffett’s Coca-Cola Stake Rallies

Warren Buffett’s Berkshire Hathaway Inc., the largest investor in Coca-Cola Co. (KO), jumped the most since January in New York trading on gains in the value of its stake in the soft-drink maker. Berkshire Class A shares rallied $4,000, or 2.6 percent, to $161,000, a record closing price. Atlanta-based Coca-Cola surged 5.7 percent after posting first-quarter profit that beat analysts’ estimates and announcing a deal to sell some bottling distribution rights in North America. Buffett’s firm has 400 million Coca-Cola shares, making it one of the four largest holdings at Omaha, Nebraska-based Berkshire, along with investments in Wells Fargo & Co., American Express Co., and International Business Machines Corp. Berkshire’s stakes in the companies may increase in the future as the firms buy back shares, Buffett said in a letter to investors last month. “The four companies possess marvelous businesses and are run by managers who are both talented and shareholder- oriented,” Buffett said in the letter. “Too much of good thing can be wonderful.”

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net

Updated April 16, 2013, 7:59 p.m. ET

New Coke: Bottlers Are Back

Beverage Company Expanding Delivery Territories for Five of Its Independent Bottling Companies

By MIKE ESTERL And PAUL ZIOBRO

Coca-Cola Co. KO +5.69% likes to have its cake and eat it too.

That is why it sold its bottlers and then bought them back again. That is why it is now going back to the franchise model for distribution.In a deal that would allow it to keep vast amounts of control over its business, Coke said it reached an agreement in principle to expand territorial distribution rights to five independent bottling partners. That would reduce Coke’s direct control over its U.S. distribution only to about 75% from 80% currently. The company said more such deals are on the way as it backs out of the delivery business.

“You need to walk before you run,” saidMuhtar Kent, Coke’s chief executive, in an interview, of the step-by-step approach.

In 2010, Coca-Cola Co. paid $12.3 billion to buy its biggest U.S. bottler in order to secure control of most production and distribution in its home market. Now, this latest approach will allow it to keep production of popular brands including Sprite, Powerade, Minute Maid and Coke in-house but gradually parcel out distribution once again.

The move is a delicate balancing act by Coke, which is trying to keep a tight grip on how its drinks are made and sold while shedding the capital-intensive business of maintaining delivery trucks, routes and warehouses. Coke also is seeking to boost sagging profit margins in the U.S., where soda consumption has fallen eight straight years.

Coke’s share price surged 5.7% Tuesday to close at $42.37 on the New York Stock Exchange as Wall Street applauded the model even as the company reported a decline in first-quarter profit and revenue.

“Today’s announcement gives a clear road map. A lot of uncertainty was lifted,” said Bill Pecoriello, head of Consumer Edge Research.

The Atlanta-based company’s move could prompt PepsiCo Inc.,PEP +1.37% its main beverage rival, to speed up its own review of its operations. PepsiCo paid $7.8 billion in 2010 to acquire two large independent bottlers, also giving it direct control of most of its U.S. beverage manufacturing and distribution. PepsiCo has said it won’t update investors on any potential structural changes before next year.

Both Coke and PepsiCo are searching for ways to pump up profits in the U.S. Coke said Tuesday that its first-quarter net income fell to $1.75 billion from $2.05 billion due to restructuring charges. Revenue fell 1% to $11.04 billion, hurt by two fewer selling days in the most-recent quarter. Coke said its North American soda volumes dipped 1% in the quarter.

Coke currently has about 70 small bottling partners manufacturing and delivering about 20% of its drinks in the U.S. Tuesday’s announced deal would increase the scale of five of them: Coca-Cola Bottling Co. Consolidated,Coca-Cola Bottling Company United Inc., Swire Coca-Cola USA, Coca-Cola Bottling Co. High Country and Corinth Coca-Cola Bottling Works Inc. Financial terms weren’t disclosed.

But unlike past distribution deals, some of which stretch back generations, Coke isn’t giving the bottlers perpetual rights to the new territories. Instead, bottlers would be given 10-year licenses for any new real estate, which then need to be renewed. The initial deals with the five bottlers aren’t expected to close until 2014.

Mr. Kent said a lot has changed since Coke began striking U.S. distribution deals for its famous cola roughly a century ago. At the time, territories were determined by how far horse-driven carriages could travel in a single day. The new distribution deals are “moving us into the 21st century,” he added.

Selling off distribution rights could earn Coke a lot of cash. Consumer Edge Research estimates that the 80% share of U.S. distribution rights currently owned outright by Coke to be worth around $9.5 billion.

Coke isn’t ready to surrender control over manufacturing, though, planning instead to further integrate bottling operations around the country. Manufacturing of Coke products currently is spread over hundreds of facilities.

Mr. Kent didn’t rule out bottling partners taking stakes in a nationwide manufacturing company for Coke products at some point.

Analysts say distributing and bottling beverages typically have lower profit margins than concentrate sales. Coke’s operating profit margins in North America dropped to 13.2% in 2012 from 21.4% in 2009, weighed down in part by the company’s acquisition of Coca-Cola Enterprises Inc.’sCCE +2.66% U.S. bottling and distribution assets in 2010, according to Stifel Nicolaus analyst Mark Swartzberg.

Mr. Swartzberg said he wouldn’t be surprised if Coke eventually also sells majority stakes in the manufacturing part of the business a few years down the road.

TUESDAY, APRIL 16, 2013

Coca-Cola Looks a Bit Too Bubbly

By JOHANNA BENNETT | MORE ARTICLES BY AUTHOR

Sure it’s an iconic brand, but at more than 19 times forward profits, shares of the beverage giant look expensive.

With its share price reaching a new multi-year high, Coca-Cola has given investors some much needed refreshment.

In an earnings report released Tuesday, the world’s largest beverage company beat first-quarter expectations by a penny. Coca-Cola (ticker: KO) earned 46 cents a share on revenue of $11.04 billion, exceeding consensus estimates of 45 cents a share on revenue of $10.9 billion.

But what really drew investors’ attention was an announcement laying out a new U.S. business model that marks the first step by the company to return U.S. bottling operations to independent bottlers, less than three years after it paid big bucks to gain control over a chunk of that business.

Analysts applauded the move as a means of unlocking value for shareholders, and Wall Street took a healthy swig. At $42.22, the shares were up 5.3% in afternoon trading, not far below its all-time high.

But investors would do well to wait for a better entry point before diving into the stock. Though New York’s Mayor Bloomberg failed to shrink serving sizes, Americans are reducing soft drink consumption on their own. Economic problems in Europe and China continue to create headwinds for the company.

And at 19.5 times projected earnings over the next four quarters, Coca-Cola looks expensive, especially for a company expected to grow its bottom line roughly 6% this year.

To be sure, Coca-Cola has been a good stock for investors, the stock is up more than 20% over the last 12 months compared with 14% gains for the S&P 500 index.

The attraction is understandable. Coca-Cola is an iconic brand. The company generates piles of cash, enabling it to steadily sweeten its dividend payment. That and a steadily expanding bottom line led Barrons.com to weigh in bullishly on the stock last summer (see Barron’s Take, “Coca-Cola Can Bubble Higher,” July 17).

But with investors flocking last year to safe, dividend-paying stocks, big consumer staples companies have become crowded trades. To take just one example: On a price/earnings basis, the sugar-water purveyor is almost twice as expensive as Intel(INTC), the Coke of computer chips.

“With the market approaching year-end valuations, we would not want to commit new capital at this point,” says Oliver Pursche, co-manager of the GMG Defensive Beta Fund. “If there’s a 3% to 4% pullback, we would take advantage of that. It’s a great company, but it’s a challenging market over the next 45 days.”

In the meantime, things aren’t all that bubbly for Coca-Cola. In the first quarter, global volumes rose 4%. But Europe is weak, and in China, volume growth slowed to 1%. Latin America remains a big contributor to global profit and revenue growth. Meanwhile, the company is laboring to streamline distribution in the U.S.

In 2010, Coca-Cola bought the North American operations of Coca-Cola Enterprises and now bottles 80% of its drink volume sold in the U.S. But today, Coca-Cola announced a rough framework for handing off distribution in certain geographic areas to five bottlers either through an outright sale, territory swap, or some other arrangement.

The deals are in principle only. Coca-Cola must still reach an agreement with the bottlers by the end of the year. Wells Fargo analyst Bonnie Herzog applauded the strategy in a note published today, writing that it will allow the company to “leverage deep local knowledge” to become more customer-focused and deliver products more efficiently.

Still, Coca-Cola and other soda makers remain in the crosshairs of public health advocates and regulators who feel their sugary drinks contribute to growing waistlines, and, as a result, health-care costs.

The Street sees Coca-Cola earning $2.14 a share in 2013, up 6% over 2012, and earning another $2.33 a share next year, according to consensus estimates compiled by Thomson Reuters. Profits could grow an average of 9% annually over the next several years.

That kind of growth is nothing to sneeze at. But it lags consensus growth projections for the broader consumer staples sector as well as the S&P 500. And Coca-Cola’s stock trades at premiums to both.

For now, investors may want to wait for the fizz to die down before taking another slug.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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