1999: Is Coca-Cola's P/E too high?

AUDIENCE MEMBER: Good morning, Mr. Buffett. My name is Jean-Philippe Cramers (PH), and I’m coming from London, England. I have a question regarding Coca-Cola.

The first part is, are you worried that the earnings of Coca-Cola might continue to be affected by the weakness in the emerging markets and the strength of the dollar over the next few years?

And the second part is on the P/E ratio of Coca-Cola at 35 times earnings. Are you worried about the potential rise in interest rates? And is it linked to your views on inflation that you are not worried about the rise in interest rate? Thank you.

WARREN BUFFETT: Well, in relation to the strength of the dollar, which means that profits in foreign currencies don’t translate into as many dollars, we — I — we don’t have any big feeling on that.

I mean, if I — if we had strong feelings about the dollar’s behavior, vis-à-vis the yen, or the euro, or the pound, or whatever it might be — you know, we could give vent to those views by actually buying or selling large amounts of foreign exchange.

We don’t know what — which way the dollar’s going to go. So, I have no — I have nothing in my mind, in regard to any decision on buying or selling Coke, that would relate to any prediction in my mind about the course of the dollar.

The earnings of Coke have been affected by the strength of the dollar in the last few years, particularly the strength against the yen when, you know, when it went from 80-odd to 140-odd. That was a huge hit, in terms of what the — in terms of the yen translation into dollars from those profits. And the strength of the dollar generally would hurt.

But looking forward, I don’t have any prediction on that.

It’s in Coke’s interest to have countries around the world prosperous. I mean, they will benefit from increased prosperity, increased standards of living, throughout the world. I think we’ll see that over any 10 or 20-year period. I think people’s preference for Coke will do nothing but grow Coca-Cola products.

So, what I am concerned about is share of market and then, what I call share of mind. In other words, what do people think about Coca-Cola now, compared to 10 years ago or 20 years ago? What are they going to think about it 10 years from now?

Coca-Cola has a marvelous share of mind around the world. Everybody in the world, almost, has something in their mind about Coca-Cola products and overwhelmingly, it’s favorable.

You can’t — you know, try to think of three other companies like it. I can’t do it, in terms of that ubiquity of good feeling, essentially, about the product.

We measure it by unit cases sold and by shares outstanding. And we want a lot more unit cases sold. And we like the idea of fewer shares outstanding over time.

I’ll give you — I’ll be giving that same answer 10, or 15, or 20 years from now. And I think they’ll be a lot more unit cases sold then.

It is true that the case growth slowed starting in the second half of last year and continuing through the first quarter of this year. But that’s happened from time to time in the past.

In my view, you know, that is not — it’s not an important item. It may be an important item in what the stock does, you know, in a six-month period or a one-year period. But we’ll be around 10 years from now, and Coca-Cola will be around 10 years from now.

And right now, we own eight-point-one or two percent of Coca-Cola. And we’ll probably own a larger percentage 10 years from now, because they’ll have probably repurchased some stock.

The P/E ratio of Coke, like virtually every other leading company in the world strikes us as, you know, they all strike us as being quite full.

That doesn’t mean they’re going to go down. But it does mean that our enthusiasm for buying more of these wonderful companies is less than it was when the P/E ratios were substantially less.

Ideally, those are the kind of companies we want to buy more of over time. We understand their businesses.

And my guess is that there’s a reasonable chance, at least, that sometime in the next 10 years, we buy more shares of either Coke or Gillette or American Express or some of those other wonderful companies we own.

We do not like the P/E ratios, generally. But, again, I stress that does not mean they’re going down. It just means that we got spoiled in terms of how much we got for our money in the past. And we hope that we get spoiled again.

Charlie?

CHARLIE MUNGER: Yeah, I — if what matters to you is what you think Coke is going to look like 10 years out or even further out, you don’t really pay much attention to short-term economic developments in this country or that, or currency rates, or any other such things.

They don’t really help you in making the 10 or 15-year projection. And that’s the one we’re making. So, we have tuned out all this noise, as it’s called and what —

WARREN BUFFETT: Sometimes.

CHARLIE MUNGER: — communication networks — tune out the noise. And if you look at the big picture, we think Coke is fine.

WARREN BUFFETT: It’s hard to think of a better business in the world, among big businesses. You know, there’s obviously companies that are starting from much smaller bases that could grow faster. But it’s hard to think of a much more solid business.