Why doesn’t Buffett own Coca-Cola Amatil?

Warren Buffett is a longtime investor in The Coca-Cola Company, but has Coca-Cola Amatil been the better investment?

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It’s well known that legendary investor Warren Buffett not only loves to drink Coke but that his company Berkshire Hathaway (NYSE: BRK.A) is also the largest owner of The Coca-Cola Company (NYSE: KO). It’s also well known that Buffett’s purchase of Coca-Cola stock has netted his firm billions of dollars in profits and that he considers the company one of the very best on the planet.

Australian investors are of course familiar with Coke bottler Coca-Cola Amatil (ASX: CCL). With Coca-Cola Amatil’s annual general meeting (AGM) being held on Tuesday and a profit downgrade being delivered, it seems like a good time to consider the different business models of each company and why Buffett has long owned one but not the other.

The profit downgrade

At the AGM, Managing Director Terry Davis announced a downgrade in expected earnings before interest and tax of 8% to 9% in the first half. This guidance was not well received by the market, with the share price falling around 10%. What’s more, management guided towards a particularly strong second half and suggested that full year earnings would be flat. Given the first half has included a longer than usual spell of warm, dry weather – which is conducive to beverage consumption – management has placed high expectations on a stellar result in the historically stronger second half.

Since the turn of the century, Coca-Cola Amatil has outperformed

As the chart below shows, from January 2000 based on share price performance, Buffett would have actually been better off owning the Australian bottling business rather than the USA parent. So why didn’t he? Well only Buffett can answer that question but I’m sure part of his answer would include a discussion of the appealing business model of the parent company. The Coca-Cola Company actually produces and sells the syrup that makes Coke; without the syrup there is no Coke! Obviously the value of this closely guarded recipe is enormous and probably everlasting. Meanwhile our domestic bottler must purchase the syrup and then manufacture and sell the beverage.

Coke Chart

Source: Google Finance

Given Buffett takes a “forever” view of investments, it’s probable he thinks in the very long run, Coca-Cola’s business model is superior. However 13 years is a decent time frame and over that period the profits and subsequent share price performance speak for themselves!

Coca-Cola’s earnings per share (eps) in 2000 were 88 cents per share (cps). In 2012 they had growth to $1.97 per share, an increase of 124%. Over the same period Coca-Cola Amatil’s eps grew from 19.7 cps to 60.4 cps, an increase of 206.5%.

Foolish takeaway

It is interesting to note that Coca-Cola Amatil currently trades on 21 times earnings, while its syrup supplying parent is selling for 22 times earnings. Both businesses have reasonable growth prospects and are quality businesses but they have vastly different business models and different future prospects, which leads me to think at least one of them is incorrectly valued.

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