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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.
Image source: Coca-Cola
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.