24 BARRON’S October 26, 2020
with the successful introduction of a
North American brand, Fuze Tea, in
Europe, Lieberman says.
“The Coca-Cola brand and red-can
Coke are held up as sacred things in
the company,” says Duane Stanford,
the editor of Beverage Digest. “What
Quincey has said is that it’s OK to ex-
periment with Coke with coffee and
Coke Energy and extend the brand. He
has said, ‘We can preserve the legacy of
Coke and modernize it.’ It’s hard to
overestimate the importance of that.”
Many investors favor rival Pepsi-
Co’s powerhouse snack-food business,
Frito-Lay, over Coca-Cola’s beverage
empire. Frito-Lay generates over half
of its parent’s profits.
Coke, PepsiCo, and Procter & Gam-
ble all have similar valuations—low- to
mid-20s multiples of projected 2021
earnings. A Covid-19 play, P&G has
gotten a lift this year as heavy demand
has led to shortages of some of its
leading products, including Bounty
paper towels and Charmin toilet pa-
per.
Soda might prove more durable than
critics believe, however. “The carbon-
ated soft drink business has been a
relatively reliable way to generate low-
to mid-single digit sales growth,” says
Brett Cooper, an analyst at Consumer
Edge Research, who rates Coke Over-
weight, with a $58 price target.
The company doesn’t have many
fans among institutional investors.
Coke’s profit gains are too anemic for
most big growth-stock investors, who
prefer faster-growing internet “sta-
ples,” such asAmazon.com(AMZN),
Facebook(FB), and Google parent
Alphabet(GOOGL). And the bever-
age maker’s valuation makes it too
pricey for many value investors.
Jason Subotky, a portfolio manager
at Yacktman Asset Management, and
a holder of Coke shares, sees it differ-
ently: “In an environment where
rates have gone down and price/
earnings multiples have gone up, one
of the things you prize most are con-
sistent and predictable businesses.
Coke is one of the best-positioned
companies in a world of disruption,
given its market presence worldwide.
Who is going to dislocate Coke?”
Consumers drink two billion serv-
ings of Coke products daily, bought
at 30 million retail outlets and sup-
plied through 225 bottling partners
around the world.
Subotky says Coke’s “ability to
expand the consumption of beverages
and achieve reasonable volume growth
and some pricing continues to be there.
The currency challenge has been se-
vere, and that might go from being a
headwind to tailwind.” He views Coke
as the stock market equivalent of a
triple-A bond, given its 3%-plus yield
and relatively stable business.
Coke’s debt carries rock-bottom
yields, with the company’s 10-year
paper around 1.4% and its 30-year
obligations at 2.5%, less than a per-
centage point above risk-free U.S.
Treasuries.
C
oke’s most famous booster is
Warren Buffett, whoseBerk-
shire Hathaway(BRKB) has
owned a large stake since the
late 1980s. That holding of 400 mil-
lion shares, now worth $20 billion,
hasn’t changed in more than 20 years.
It represents 9% of the shares out-
standing, making Berkshire Coke’s
largest investor.
Buffett, Berkshire’s CEO, made a
well-timed purchase; Coke stock rose
about tenfold in the decade after he
acquired his holding.
But the shares haven’t appreciated
much since 1998. Coke’s stock market
ranking has fallen to 29th from eighth
since 1998, and its current market
capitalization of $218 billion is below
Salesforce.com’s (CRM) $227 billion.
Buffett declined to comment to
Barron’s, but he told CNBC two years
ago that “if you look at the return on
tangible assets, you’ve got a very good
business,” while acknowledging that
“it doesn’t look as good as it did five
or 10 years ago.” He attributed that
to reduced brand loyalty linked to a
growing willingness among consum-
ers to try different products.
A numbers maven, Buffett pointed
out that Coke sells 100 ounces of bev-
erages annually for each of the seven
billion people on the planet.
He’s a big consumer, drinking sev-
eral Cokes a day. Buffett even has a
Coke soda fountain in his Omaha of-
fice. He joked earlier this year in a
Yahoo! interview that all of those
Cokes may have helped him stave off
Covid-19.
A potential new worry for Coca-Cola
is the rise of socially responsible and
environmental, social, and corporate
governance, or ESG, investing. Coke’s
high-sugar drinks, critics say, contrib-
ute to the global obesity problem.
Then there is the environmental impact
of all the waste from the 120 billion
plastic bottles used to package its prod-
ucts each year.
Jeff Ubben, a leading activist investor
who is now a socially conscious one,
said recently that Coke could be hurt by
the plastic-waste issue.
Bottled Up Too Long
Coke’s earnings have been stuck around $2 a share for the past decade. It’s why critics call Coke a no-growth “growth” stock.
$2.20
2.10
2.00
1.90
1.80
1.70
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020*
- Estimated Source: FactSet
The Claus that
refreshes: A local
Coca-Cola salesman
dressed as Santa
Claus distributes
gifts to an orphan-
age in Bacolod, in
the Philippines,
in 1999. Emerging
markets like the
Philippines are key
to Coke’s growth.
Marcial Angelo/AFP/Getty Images