Warren Buffett's investment vehicle Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) has held a big stake in Coca-Cola (NYSE: KO) for decades. Its investment in the beverage giant makes it a major shareholder: It currently holds almost 10% of the company with a position worth nearly $18 billion.
But as an investment, is Coke a better buy than the stock of its longtime shareholder? Let's explore that question.
Sugar inhibits growth
Although Coke is still a profitable company, its power is eroding. Coke's annual revenue has declined every year since 2012, while its trailing 12-month net income has cratered by almost 50% over the last five years.
Why the drops? A major factor in recent years has been the shift in customer tastes toward healthier foods and beverages. Coke is the poster boy for producers of sugar in a can, so its products are frequently cited as examples of what not to drink if one wants a long and healthy life.
Although the company has acquired several healthier beverage brands, and these more wholesome products are enjoying success, its portfolio is still full of sugary offerings. And unlike arch-rival PepsiCo, Coke has resolutely stuck to beverages as the foundation of its business, rather than branching out into foods. Pepsi has a strong portfolio of food products, including Doritos, Ruffles, and other snacks that pair nicely with a fizzy soft drink.
To its credit, Coke is trying to broaden the appeal of its products. The recent introduction of a quartet of funky Diet Coke flavors, complete with a slim and sleek new can design, has garnered attention. But that probably won't stir people who are determined to eat and drink healthier products, which are ever more commonplace on store shelves these days.
Many expect Coke's strength to keep waning. On average, analysts are expecting revenue to decline about 12% year over year to just over $35 billion this fiscal year (2018) before recovering modestly by 4% in 2019. The prospect for per-share net profit is brighter, with analysts calling for 8% growth this year and a 9% improvement in 2018.
We should keep in mind, though, that EPS development is affected by generous rounds of share buybacks (which reduce the overall share count, boosting EPS).
Not feeling Wells
Ever a highflier, Berkshire has outperformed its big beverage investment in terms of both headline fundamentals and share price over the past few years. Its bulging portfolio consists of numerous companies that deliver strong results and meaningful growth.
There are, of course, exceptions. Coke is one of them, as is big and stumbling bank Wells Fargo (NYSE: WFC). Racked by scandals, Wells Fargo was recently hit with an unprecedented and extremely restrictive sanction from the Federal Reserve, under which it won't be able to grow its assets. The company's stock understandably took a hit in the wake of the news. This will hurt Berkshire's performance too, as Wells Fargo is its top holding at over $26 billion, or about 14% of Berkshire's total equity portfolio.
Still, most of Berkshire's big stock holdings are winners. Wells Fargo might be a dog just now, but another monster Berkshire financial-sector position, Bank of America, is fully reaping the benefits of an up cycle for banks. Moody's is also doing well, while American Express continues to recover from its 2016 divorce with Costco Wholesale.
And Berkshire has substantial positions in high-performing companies outside of the financial sector. For example, Apple keeps smashing its own records in key fundamentals, and Phillips 66 is a big player in oil refining, a sector that had a fine 2017.
So although Buffett might wish he had a bit less exposure to the likes of Wells Fargo at the moment, Berkshire's overall equity portfolio is strong enough to keep growing despite its laggards (we can't definitively say the same for its many privately held companies, as their results are not made public). Additionally, Berkshire's mighty insurance operations continue to collect billions of dollars in premiums every year.
The healthier choice
For me, this isn't much of a contest. Coke has seen better days, and although it's still a well-managed company, it's not in an ideal position to capitalize on that big shift to healthier consumption. Berkshire has a few Cokes and Wells Fargos dragging on its portfolio, but not enough to put the brakes on the growth train it's been on for many years.
So in this bout, I'm not hesitating to pick Berkshire as the victor.
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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), and Moody's. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends American Express and Costco Wholesale. The Motley Fool has a disclosure policy.