Baby Buffett vs. Buffett and Munger’s Berkshire Hathaway

William 'Bill' Ackman. CEO and Founder of Pershing Square. Source: Forbes

William ‘Bill’ Ackman. CEO and Founder of Pershing Square. Source: Forbes

After earning his investors $1 Billion USD in 2014 and performing as the number 1 hedge fund manager, it appears that Bill Ackman has some troubles lately.

In the Berkshire Hathaway 50th Anniversary Symposium that was held on Wednesday, November 11, 2015, he stated the following:

“I have a problem with Berkshire’s ownership of Coke,” this statement was in response to a question about whether he’d found himself on the opposite side of a trade from Berkshire. “Coca-Cola is a company that I wouldn’t own.”

Further, the soda company has “caused enormous damage to society.” “Coca-Cola has probably done more to create obesity and diabetes on a global basis than any other company in the world,” Mr. Ackman said. The company, he said, has “displaced the water that children and adults consume with sugar water.”

As of 6/30/2015. Berkshire Hathaway (ticker: BRK.A/BRK.B), fifth largest U.S. company with $335 billion in market capitalization, has ~$16Billion worth of investment in Coke (ticker: KO) and it is Berkshire’s second largest publicly listed held company.

Bill Ackman, on the other hand, has this to say on his ~$5.5 Billion USD Mondelez (ticker: MDLZ) stake, ‘it’s “okay to have a chocolate bar or Oreo cookieonce in a while, and the maker of Oreo cookies wasn’t trying to replace “your grilled chicken with Oreos.” By comparison, he said, Coke’s business model was to “displace water with sugar water.”’

Mondelez has numerous very well-known products: Cadbury, Ritz crackers, Halls candy, Tang juice, Honey Maid, Oreo cookies, and so on.

Going back,

“These comments are irresponsible and do not recognize the current breadth of our business,” a Coke spokesman said.

Bill Ackman maybe in defense right now after the Pershing Square had a poor year-to-date performance -21.2% this year (2015).

Mr. Ackman also had difficulties outperforming because of recent problems with Valeant Pharmaceuticals, which Charlie Munger, vice chairman of Berkshire Hathaway, mentioned “It’s just a company that was too aggressive in ignoring moral considerations in the way it did business.” And also relating into a company that is “deeply immoral.”

In addition, Mr. Ackman’s Pershing Square and Valeant will now be facing an insider trading lawsuit. According to a Reuters article, “The lawsuit was filed on behalf of investors who sold Allergan shares in the two months before the defendants on April 22, 2014 announced an unsolicited $51 billion bid for Allergan.”

Running some numbers, let us see how each company had performed for the past decade

Mondelez International Inc Class A (ticker: MDLZ) with a market capitalization of $68.8 USD Billion and Coca-Cola (ticker: KO) with $180 USD Billion

First, Operating Margin.

Operating Margin. Author's calculation. Source: Barron's

Operating Margin. Author’s calculation. Source: Barron’s

It appears that KO had a wonderful 10-year performance of earning in its operations compared to MDLZ. 10-year median gave KO 24% while MDLZ had only 11.6. I personally require >30.

Next, Debt to Equity Ratio (personal requirement of <0.5)

D/E equity Ratio

D/E equity Ratio

It appears that both companies has the same 10-year median D/E ratio. However, looking at this closely, KO appears to be increasing its debt for the past decade, while MDLZ is reducing. I’d give MDLZ a point here. One must further check KO’s operations and ask the following questions: are they spending more in operations to operate and stabilize their margins, are they giving too much back (dividends, share repurchase) to their shareholders, etc.

Anyhow, the DE ratio of the two with ~0.4 is VERY ACCEPTABLE.

Next, Net Margin (personal requirement of >8)

Net Margin.

Net Margin.

MDLZ had a 10-year median of 8 while KO had 19. KO won this metric.

Next, Net Income (Profit) and Profit growth

MDLZ Net Income and Profit Growth (author's calculation)

MDLZ Net Income and Profit Growth (author’s calculation)

I personally would require a company to have an increasing profit over time, also, with steady or at least positive 10-year median growth;. MDLZ passed this metric (at least basing on historical performance) with 8%.

KO Net Income andd Profit Growth (author's calculation)

KO Net Income andd Profit Growth (author’s calculation)

Interestingly, KO had shown 10-year median profit growth of only 1%. MDLZ wins this metric–although it’s important to note that MDLZ has an ‘outstanding’ profit growth this year. Removing this year’s growth from the calculation, MDLZ still showed a 4% 9-year median profit growth.

Next, Free Cash Flow (Cash Flow From Operations minus Capital Expenditures)

Free Cash Flow MDLZ and KO.

Free Cash Flow MDLZ and KO.

KO has an outstanding performance in this aspect. Probably because of its existing brand name and global operations (not to take away anything from MDLZ), it had almost doubled each and every year’s MDLZ’s free cash flow for the past decade and STILL growing.

Computed Annual Growth Rate of FCF from MDLZ and KO

Computed Annual Growth Rate of FCF from MDLZ and KO

Looking at the 10-year performance, KO had outperformed MDLZ in this metric by 1,000 basis points or 10%. Maybe this is why Warren Buffett still holds large amount of investment in KO since late 1980’s.

I’d still recommend further financial dissection prior to making any investment in either of these two great companies.

That’s all for now.

Reference

Reuters

WSJ

Disclosure: I do not have shares in any of the companies mentioned in this article and don’t plan to initiate purchase within the next 24 hours. I would not receive any compensation for doing this article. I am not a professional financial analyst. This is just a hobby. Lastly, my work is not error-free, but I strive for it to be. Do not consider as a buy or sell advice. Invest at your own risk.

If you are interested in this similar approach to investing and would seek updates, I wish to invite you to this Facebook group SEEKING VALUE (https://www.facebook.com/groups/SeekingValue/?ref=bookmarks)

Happy investing.

Mark Y.

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