134 THE WARREN BUFFETT WAY
Coca-Cola
From the time that Roberto Goizueta took control of Coca-Cola in
1980, the company’s stock price had increased every year. In the f ive
years before Buffett purchased his f irst shares, the price increased an av-
erage of 18 percent every year. The company’s fortunes were so good
that Buffett was unable to purchase any shares at distressed prices. Still,
he charged ahead. Price, he reminds us, has nothing to do with value.
In June 1988, the price of Coca-Cola was approximately $10 per
share (split-adjusted ). Over the next ten months, Buffett acquired
93,400,000 shares, at an average price of $10.96—f ifteen times earnings,
twelve times cash f low, and f ive times book value. He was willing to do
that because of Coke’s extraordinary level of economic goodwill, and be-
cause he believed the company’s intrinsicvalue was much higher.
The stock market’s value of Coca-Cola in 1988 and 1989, during
Buffett’s purchase period, averaged $15.1 billion. But Buffett was con-
vinced its intrinsic value was higher—$20 billion (assuming 5 percent
growth), $32 billion (assuming 10 percent growth), $38 billion (at 12
percent growth), perhaps even $48 billion (if 15 percent growth). There-
fore Buffett’s margin of safety—the discount to intrinsic value—could
be as low as a conservative 27 percent or as high as 70 percent. At the
divided by [10 minus 3 percent]). So the $223 million purchase
price represented a very good value. Also, Buffett was con-
vinced the fundamental economics of the company were sound,
and that the lower numbers were a short-term response to the
depressed economy at the time.
As is so often the case, Larson-Juhl approached Berkshire,
not the other way around. Buffett describes the conversation:
“Though I had never heard of Larson-Juhl before Craig’s call, a
few minutes talk with him made me think we would strike a
deal. He was straightforward in describing the business, cared
about who bought it, and was realistic as to price. Two days
later, Craig and Steve McKenzie, his CEO, came to Omaha and
in ninety minutes we reached an agreement.”^12 From f irst con-
tact to signed contract, the deal took just twelve days.