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?

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

With its legendary, fully franked 28 cent dividend, Telstra is the darling of Aussie investors. But with its share price skyrocketing over the past year, is Telstra past its prime? Click here for our brand-new report: “Is It Time to Sell Telstra?”

More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »