40: Buffett's Ultra-Simple Analysis of Coca-Cola; Negative Compounding; Checklist Items
Keep it simple
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Buffett’s Simple Analysis Framework
Warren Buffett keeps things simple. His incredible mind has the rare gift of taking complex ideas and making them seem almost obvious.
Here’s how he looks at Coke in an ultra-simplified way:
Unit case sales
Shares outstanding
That’s it. If #1 is going up and #2 is going down, you’re going to do very well.
Of course, there’s more to it, and Buffett didn’t get to that simple framework without a lot of reading/study. He also touches on the incredible value of Coke’s intangibles when he alludes to how much they add in value through growing case sales internally.
Negative Compounding
In watching that video above I was reminded of another piece of analysis Buffett did in 2014. Coke’s management came up with a plan that was overly generous to managers. After an abstention by Berkshire Hathaway, Coke revised its plan to include less dilution to shareholders.
In thinking about the 1998 video it’s clear Buffett was concerned that the issuance of shares would mean going in the opposite direction on one part of his two-part ultra-simplified analysis.
Adding A Few Checklist Items
I use this basic framework in my own analysis of companies to ask a few questions:
What is the general trend of shares outstanding over the years?
How does management use share issuance/repurchases in its capital allocation decisions?
Are equity awards (if any) structured to provide proper long-term thinking?
Is the repurchase program (if any) mechanistic or opportunistic? I.e. are repurchases done without regard to the intrinsic value of the business just to “return capital to shareholders” or does management have an idea for what it’s worth?
Stay rational! —Adam
Cover photo by Ayesha C on Unsplash
