Whilst all the videos are spectacular (for obvious reasons: Gotham Capital is probably the best value investing firm in recent history), this is the only one I strongly disagree with.
I think that Berkshire’s Coke investment is perhaps the best special situation opportunity of all time, requiring almost no projection into the future at all (as this video would have you believe). At the time (1988-89), KO completed a massive corporate restructuring and share buyback. KO spun-off or sold all its bottlers and entertainment units – releasing huge amounts of cash in the process (which was used to buyback large amounts of shares). Yet, KO still retained stakes in these bottlers after the spinoff (similar to the Sears chapter in Greenblatt’s own book).
On a EV/Look through earnings or even a EV/EBIT (Owner Earnings) basis, KO was probably selling for way less than a 5-7x multiple (or more than a 14% yield), yet required almost no capital (all that was left was essentially a marketing and distribution business). Plus, KO’s (legendary) management were shrinking the share count every single year into the forecastable future, thereby growing EPS almost automatically.
Sure, interest rates were high, but KO had such an extremely high ROIC after such a restructuring that it required little in the way of fixed costs in its core business (syrup selling). Why does this matter? Well, over the long run, its not so much interest rates that matter as much as inflation (Buffett’s favourite obsession). To quote, “inflation is a tapeworm…whatever the level of corporate profits…more dollars for receivables, inventory and fixed assets are continuously required in order to merely match the unit volume of the previous year…the tapeworm of inflation simply cleans the plate” (Buffett). So whilst KO did have some pricing power with regards to keeping pace with inflation, the main attraction is the lower requirement of tangible assets per dollar of sales.
Put simply, KO’s massive corporate restructuring/global expansion implies that it paid investors three times over: once in share buybacks, once as dividends and, mostly valuably, once in overseas expansion (its ability to ‘reinvest’ its equity coupon) which required little in the way of actual tangible investment. Meanwhile, competitors like Pepsi kept their bottling plants and manufacturing, thereby requiring a larger proportion of investment to earn an equal dollar of sales. All this requires almost no forecast.
So my conclusion is that KO’s quoted 16x P/E multiple in the lecture is extremely misleading and the real similarity between Moody’s in 2000 and Coke in 1988/89 is the corporate restructuring, the ability to reinvest and the free-up of capital – as opposed to the multi-year cash flow predictions that Mr. Goldstein presented (my guess is that Goldstein and Greenblatt know this, but wanted to present a simplified view).
Some of you could still disagree (and I’m probably wrong), but I leave you with one question: Why 1988? Didn’t Buffett always know about Coke? He had already bought Sees and invested in The Washington Post and Amex, thereby knowing about “moats” etc. further, Coke had pretty much always been the worlds most recognised brand, so why 1988? “Sometimes you get the present at a discount and the future thrown in for free” – Warren Buffett, Fortune Interview.
Thank you John. This is my favourite site on the internet and this is a lecturer series presented by my favourite investor.
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Not able to download the video.
Try the link now. Best,
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