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No. of Recommendations: 3
Christiano Ronaldo at the Euros last night removes two coke bottles and replaces them with water to send a message. He has 270m Instagram followers.

https://youtu.be/x2ZLS1V3iMw
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No. of Recommendations: 1
And on the news in the UK this morning drinking coca cola is being compared to smoking cigarettes.
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And that comment above by a GP (doctor) on prime time BBC news.
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No. of Recommendations: 6
And on the news in the UK this morning drinking coca cola is being compared to smoking cigarettes.

I guess one can compare any two things, whether it's meaningful or not. My cufflinks are less musical than a bonobo.
But this sounds like a not entirely unreasonable comparison to make.

I would imagine that you could create a pair of sentences like this:
If the average non-pop-drinker adds to their lifestyle drinking XXX ounces of Coca-Cola per day for 25 years with no other changes, they will have one chance in ten of dying as a direct result of that fact.
If the average non-smoker adds to their lifestyle smoking YYY cigarettes per day for 25 years with no other changes, they will have one chance in ten of dying as a direct result of that fact.

So, the comparison is doable. It's just a matter of estimating the ratio of XXX to YYY.

I imagine the numbers aren't so very far apart.

A stab at it:

XXX seems likely to be under 20
https://jamanetwork.com/journals/jamainternalmedicine/fullar...
Among Americans who drink pop at all, the average daily consumption is more than that.
(the surprises in that study were that the most likely lethal problem from sugary pop is digestive disease not cardiovascular,
and that diet pop is considerably more dangerous than sugared pop--but not from digestive diseases).

YYY seems to be less than 10.
All-cause mortality hazard ratio of about 1.3 for those smoking fewer than 10 cigarettes a day versus those who have never smoked.
https://pubmed.ncbi.nlm.nih.gov/10218754/
I presume most smokers smoke at least "several but fewer than 10 a day"


This is an investment forum, so the on-topic question is how this would affect investment returns.
Unfortunately, peddling products that are potentially lethal is not a big barrier to making money.
A bigger problem for making money is long run trends of consumption.
Pop consumption per capita in the US has fallen 13 years in a row, and is around 3/4 its peak.
Annual US cigarette sales have been dropping at about 10-11 billion/year for 40 years.
By linear extrapolation (which won't happen) it would hit zero in about 19 years.

Jim
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No. of Recommendations: 1
I was thinking of Warren and Charlie with their cans of coke sitting at the top table and Ronaldo putting them aside as a reflection of the change.

The next question which springs to mind is, Warren avoids investing in tobacco companies.....will these tastes affect his view on the food and drink industry? Perhaps not in his lifetime but one for the next generation.
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No. of Recommendations: 31
The next question which springs to mind is, Warren avoids investing in tobacco companies.....
will these tastes affect his view on the food and drink industry? Perhaps not in his lifetime but one for the next generation.


It's an interesting question...where does Berkshire management draw the line of what's odious, and where will they draw the line in future?

Personally I'd be fine with a liquidation, for much more prosaic reasons.
I don't like the financial performance figures or their likely future prospects.

Mr Market is offering 33.2 times trailing earnings at the moment for what seems no longer to be a financially interesting holding.
Here is the company's net income, inflation adjusted, for the last decade:

2011  $10639  million
2012 10565
2013 10835
2014 10287
2015 9959
2016 9363
2017 9065
2018 9560
2019 9570
2020 8856


This year might come in a bit better, they might manage $9.3bn.

Per-share figures are slightly better because of buybacks, but...
* the yield on that capital allocation is dismal. I wouldn't want to buy Coke at over 30 times gently falling earnings, but if I did, I wouldn't want Coke to do that.
* if you think of it as a cash cow based on trend earnings, you have to be careful not to count that buyback money twice.
Either you get the earnings yield, or you get the rise in EPS due to buybacks, but not both.
* Real EPS still fell 1%/year on trend, despite the buybacks (!).
In effect, the money spent on buybacks seems to be a necessary, but insufficient, cost of maintaining the value of a share...not a part of owner earnings at all.

Obviously those comments are about the past...things might take a turn for the better. Or they might not.
Earnings are likely to take a nice upswing measured in US dollars if the US dollar falls, because they are very export oriented.
But of course, earnings in US dollars will be worth less because the US dollar will have fallen.
It's still a modest net real benefit because they have a higher percentage of costs in dollars than their percentage of revenues.

Even having to pay almost $11 a share in tax when we sell, it seems a poor place to have money.
The only argument for inaction right now is that there are few other places to put it.
The dividend yield is higher than the yield on cash.
(dividends have risen in real terms in the last decade, but only because the payout ratio has risen from 50% to 75-80%...not something to extrapolate)

But surely there are things that are more reasonably priced relative to future prospects.
As a random comparison, Apple is cheaper on current earnings, and Apple's earnings haven't exactly been falling in the last decade.
In that sense, I'd rather we had more Apple instead.

Jim
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"But surely there are things that are more reasonably priced relative to future prospects.
As a random comparison, Apple is cheaper on current earnings, and Apple's earnings haven't exactly been falling in the last decade.
In that sense, I'd rather we had more Apple instead."


That warmed my heart! As I was reading your post I thought Apple is a better value. And voila.
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I applaud Christiano Ronaldo for endorsing water over Coke.

I've wondered what would have happened to the junk food industry if everyone else had spent the past year shunning it like I have. At least it wouldn't be a complete loss for Coke, because it does have a few unsweetened beverages in its lineup, and it could jump into healthy foods if it wanted to.
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No. of Recommendations: 8
That warmed my heart! As I was reading your post I thought Apple is a better value. And voila.

I could probably think of something else even better, but yeah.

My preferred way to evaluation a potential stock position is how many dollars you're paying today for each dollar of "pretty darned sure" real earnings per share on average 5-10 years from now.
That works for dead end cash cows as well as currently profitless high-growth zoomers.

Since I don't expect Coke's figure to rise materially, the figure is over 25.
Counting the "pretty darned sure" criterion, which means flat real EPS, it's over 30. Yuk.

Despite being at a cyclical high point, I think it's reasonable to posit that Apple's earnings per share could rise at least inflation+5%/year from here.
That would put their multiple measured the same way at about 20, which is cheaper.

I figure a good return can be had entering any stock position with that multiple at 12 or less, and a really good return at 10 or less.
So neither Coke nor Apple seems cheap, but I'd rather have the Apple.

The equivalent multiple for Dollar Tree might be in single digits right now.
That threshold would require their earnings per share to rise at least inflation+6.6%/year, which I think they will beat.
So I'd be "pretty darned sure" of a good outcome from here.

Jim
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No. of Recommendations: 4
Now it's Heineken..

https://www.bbc.co.uk/sport/football/57501651


"The 28-year-old Frenchman, who is a practising Muslim, made no comment on the matter - just discreetly moved the non-alcoholic beer and placed it below the table during a post-match press conference."

I quite like the non-alcoholic Heineken. Refreshing like a beer, no alcohol effects.

Adrian, 582 days.
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The equivalent multiple for Dollar Tree might be in single digits right now.
That threshold would require their earnings per share to rise at least inflation+6.6%/year, which I think they will beat.
So I'd be "pretty darned sure" of a good outcome from here.


That sounds like Dollar Tree (DLTR) might be a good candidate for DITM LEAPs then?

Tails
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No. of Recommendations: 6
“Pop consumption per capita in the US has fallen 13 years in a row, and is around 3/4 its peak.“

“Mr Market offering 33.2 of trailing earnings.”

It is incredible that the market puts a value on KO like that.

Hard sell if you ask me.

I presume there is credit for the dividend and the global distribution network, the brands, everyone has to drink daily etc. But the main reason this was a great business was the flagship product and if that is actually declining and for clear reasons including previous over consumption, health/government policy, this is not the business it once was. Selling products with less dominant positions is not going to be as lucrative.

If Berkshire plays out it’s hand on this one from here the biggest hit might come from a fall in the PE.

I really don’t get it. Taxes, alternatives uses for the capital: fair enough but this looks more like a tobacco company trading like a growth consumer goods company.

The PE could get cut in half here and it would take decades to get it back in dividends.

Shows how hard it is for Berkshire these days. I can see why you would hold it even if no incremental return on capital opportunity if you owned 100% like a See’s Candies, but if the market is offering you your next 17 years return now, I say take it. (If the price falls 50% to a reasonable IV, that’s 17 years at 3% dividend).

Disclosure: Berkshire’s capital allocators have a track record somewhat better than mine. I support the premise of Jim’s KO posts only to learn something. I’ll leave the management of the portfolio to Warren and Charlie!
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No. of Recommendations: 11
“Mr Market offering 33.2 of trailing earnings.”

I think this is too simplistic of a valuation model to apply to KO; I would guess that Buffett looks more at the cash coming in vs. the earnings multiple. Note: We often speculate on the impact interest rates (ie: bond yields) have on equities - well this is a good example.

Positives
* KO is a VERY stable company with a strong brand and moat; and we know that Buffet values stability
* KO doesn't require a lot of capital to run their business

Neutral
* KO is currently contributing just over 3% of their price as dividends - and because of its stability in earnings can *almost* be viewed as a bond alternative. 3% looks a lot better than 1.5% (10 year bond yield).

Negative
* Earnings (and thus the dividend) are unlikely to be increased as the growth prospects are very limited.

In some regard the current market price is pretty irrelevant to Buffet, he is probably more concerned with the cash he gets each quarter, and how stable that stream is.

One other note - in some ways KO is better than a bond, if inflation does start to pick up; KO does have some pricing power and thus could mitigate any inflation impact.


tecmo
...
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These primadonnas need to be reminded how their bread gets buttered.

Utter arrogance.
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No. of Recommendations: 28
Possible counterpoints---


“Mr Market offering 33.2 of trailing earnings.”
...
I think this is too simplistic of a valuation model to apply to KO;


Sure, there are other things to consider when valuing a firm.
But none of those look very good to me either.
Secular headwinds for their core business.
Brutal competition in the secondary businesses.
Bloated, overpaid and tin-eared management.
Debt is three times what it was a decade ago. Presumably a lot related to the CCE bottler purchase, but it's still debt, and didn't help earnings.
Big tax fight that might leave them weakened in a lasting way.
Fabulous firm in the past, but the emphasis might perhaps be more "in the past" than "fabulous".
Shrinking top and bottom line year after year is only one thing to look at, but it's a big thing.
For a firm whose main claim to fame is steady and rising earnings year after year, problems with net income and EPS figures are not small problems.
And now they will have to face up to problems with dividend coverage.


* KO is currently contributing just over 3% of their price as dividends - and because of its
stability in earnings can *almost* be viewed as a bond alternative. 3% looks a lot better than 1.5% (10 year bond yield).


Yes, it's a nice stable cash cow and Berkshire doesn't need the cash.
That's presumably why it's in the portfolio despite being ex-growth.
It beats cash, which Omaha already has lots of, but that's pretty faint praise.

But one might reasonably question the sustainability of that dividend.
It's a 3% dividend yield but also a 3% earnings yield.
The dividend has been rising but the earnings falling for quite a while now. That's not usually a good trend.
The current forward dividend is now more than the trailing EPS figure at Yahoo, which is too close for comfort.
I expect the dividend will probably hold in nominal terms, but I would not forecast it holding its own in real terms in the next decade.
That would require a meaningful upswing in the results.
(absent a big fall in the US dollar, meaning it would hold its own only with a shrinking yardstick)

KO does have some pricing power and thus could mitigate any inflation impact.

It's possible to view this as unlikely based on business results.
If they had such good pricing power, earnings wouldn't have been falling for so long, right?

They definitely have some products with extraordinary longevity and resilience: Coke. No question.
But that's a shrinking piece of the pie, seemingly no longer able to carry the whole dessert trolley.
If earnings didn't hold their own without inflation, I can't think of any reason they'd hold their own better with inflation.

I think of it this way:
(1) There is absolutely no reason to think it's going to be a great performer in the next 5,10,15,20,25 years.
Growth is low (negative for many years) and starting valuation is very very high.
(2) There must be a price at which it makes sense for Berkshire to sell, take the tax hit, and buy something else. Immediately, or after waiting for a good opportunity.
OK, maybe today's price isn't it. 5% higher? 10? 15? 20?

The S&P 500 equal weight index has an earnings yield that is both higher and rising faster.
Almost a quarter of the components have both higher growth rates AND higher starting earnings yields.
How hard can it be to do better?

Frankly, Mr Market is currently offering us way more than what the firm is worth.
I think we should think carefully before turning him down : )

Jim
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No. of Recommendations: 1
Is it KO that was talked about in Poor Charlies Almanac about the one company to hold and could eventually become a 2trn dollar company and having the most secure moat of any company etc etc.

Also proves the point WEB was making about the most valuable companies from 30 years are completely different from those of today. The most valuable now being Apple at 2.2trn?
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"Frankly, Mr Market is currently offering us way more than what the firm is worth.
I think we should think carefully before turning him down : )"

Can BRK sell a sufficient share of its holdings before the rest of the market realises?
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No. of Recommendations: 9
Is it KO that was talked about in Poor Charlies Almanac about the one company to hold and could
eventually become a 2trn dollar company and having the most secure moat of any company etc etc.


There is one very simple explanation: Charlie was wrong.
A lot of his description of the firm was just hindsight hagiography, and pretty obviously so even at the time.

Jim
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No. of Recommendations: 2
“Can BRK sell a sufficient share of its holdings before the rest of the market realises?”

They got out of WFC okay in this market so suspect it could be done.

Imagine Buffett selling one of his biggest names combined with the looming dividend ex growth action would cause a serious problem for the big KO PE.

Very difficult being Berkshire these days from an equity portfolio perspective. Who knows what markets will do in the short run, maybe we’ll get a taper tantrum to make life easier for Berkshire but maybe not. With Buffett handing over capital allocation at some point you would think the current situation of ever increasing over capitalisation is unsustainable. KO and others in the portfolio demonstrate that.

What is the latest on Berkshire buy backs. Has that been continuing at current prices?

Reason I’m in Berkshire for the long term is the advantages in insurance, energy etc not in trading over priced low growth mega cap stocks. And I’d be even less enthusiastic with a Buffett successor trying to make this elephant dance, for want of a better phrase. Post Buffett I’d like to see buybacks at good prices, maybe index funds, maybe some dividends. Unless of course the market starts offering up some sensible deals. But no sign of that currently.
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No. of Recommendations: 1
Warren has been asked at several AMeetings about the health aspects of KO.

He has dismissed them.

Charlie used KO as an example of a great company in his almanac.

It would be very hard for them to change their KO holdings.
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No. of Recommendations: 3
Can BRK sell a sufficient share of its holdings before the rest of the market realises?

No, probably not.
Berkshire's position equates to about all of the typical volume in 5-6 weeks, so it would probably take more than one quarter to sell.

But they can keep selling after the market finds out.
No biggie. Same as WFC.
The price might rise during that stretch. Things aren't predictable.

Jim
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No. of Recommendations: 9
“Bloated, overpaid and tin-eared management.“

This a great point. The model is not working. Have they thrown in the towel to health trends. Reminds me a little bit of McDonald’s in 2002 in some ways (health concerns and poor management). Sales were declining. Saturation. Health concerns. At $12 per share MCD had a very low PE. (It’s $234 today!) Many investors concluded that humans were gradually becoming healthy and disciplined and MCD was going to struggle.

Yet sales grew in the following decades. Part of that must have been the new management at McDonald’s.

Maybe all KO needs and will get is new management that find a way to grow the business. Maybe Buffett thinks the millions of years of evolution on the African Savannah were we developed a craving for fat and sugar is a powerful force and humans nature to struggle with discipline is not going to go away that easily. And he is simply going to wait for someone with fresh ideas. It worked for McDonald’s. Despite the financial engineering and all that corporate crap, they did sell more product and generate more cash in years since 2002.

What was it Buffett said about owning companies that an idiot could run because sooner or later that will happen.

Maybe Buffett thinks the 33 PE is not that big a deal with current interest rates and eventually management will turn things around.

Still think it’s a hard sell due to price. Would much rather buy back some Berkshire than hold KO. But maybe that’s why Buffett is in charge and not an idiot like me.

It will all be grand in the end and Berkshire will continue to make progress regardless of what happens with KO.
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No. of Recommendations: 3
Yes, it's a nice stable cash cow and Berkshire doesn't need the cash.

If BRK doesn't need the cash, why sell? What would they do with the proceeds? More buy backs? Not every holding in the portfolio needs to be high growth. Super stable earners are nice as well.

tecmo
...
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No. of Recommendations: 3
If BRK doesn't need the cash, why sell?

To make more money?


It's possible (not necessarily likely) that Coke shares will have a zero real total return in the next 15 years.
Beating that hurdle doesn't seem difficult.

Jim
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No. of Recommendations: 3
It's possible (not necessarily likely) that Coke shares will have a zero real total return in the next 15 years.
Beating that hurdle doesn't seem difficult.


Yes upside is limited - no argument there. But the downside also seems limited*. Getting a 3% return with an equivalent level of safety as KO - is that an easy hurdle?


*I think we have different opinions on this - which is fine; but for the sake of this argument, assume the downside is limited.

tecmo
...
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No. of Recommendations: 18
Taking the Devil's Advocate perspective, maybe we should not write off KO so soon.

Coke brands: https://www.coca-colacompany.com/brands

My bride and I are personally buying about $25 per month of KO's Fairlife product. I also work with several folks in the their twenties who are each consuming a large (2 quart bottle) of Fairlife chocolate milk every two days because it is low sugar and high protein (and tastes good). These same folks go to climbing gym after work and are into growing their muscles while keeping the fat off. Fairlife is gaining market share fast in the milk space. KO marketing and distribution know-how at work. https://agmoos.com/2020/01/11/coca-cola-now-sole-owner-of-fa...

Aha is gaining share in the sparkling flavored water space: https://www.beverage-digest.com/articles/283-sparkling-water...
We have Aha in our pantry and bring it with us for refreshment when we take day trips. Zero calories with interesting taste with some of the Aha varieties having caffeine.

Maybe KO is adapting to the times and demographics . . . .
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No. of Recommendations: 1
our favorite non-alcoholic brew is called "WellBeing".

They take craft brews and take the alcohol out.

Nice little business, the sell the alcohol to another food business.

Just a start up.

Not listed.

However they welcome bond investors.

To be clear, we have not invested.

But Dave gets the beer shipped to FL from STL, because it is soooo good after a run.

jan
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https://wellbeingbrewing.com/

Dave absolutely loves this stuff.

Me? I like red wines from Costco.

:^)
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Maybe KO is adapting to the times and demographics . . . .


If they are, the results are not showing up in the earnings (yet?)

tecmo
...
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https://www.bbc.co.uk/sport/football/57517337

UEFA to fine teams for players who remove sponsors bottles 🤣🤣
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They could sell KO follow munger and buy Alibaba. Now there's a thought 🤔.
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Buffett will sell KO, not now, but at the absolute bottom, like WFC and airlines. Let's see if KO gets embroiled in a scandal :-)
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People missing that KO is now more asset light. Sales trends misleading due to sales of capital intensive bottling assets. ROIC IMPROVING.

Business bad? Last Qtr: "Our Q1 organic revenue was up 6% driven by concentrates shipments of 5%. And price mix improvement of 1%."

PERCEPTION VS REALITY

Soda bad=sell. Not so fast.

MAJOR BUY
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Don’t see WEB selling on his watch-he’s very loyal, has low growth, but steady earnings/ dividend, international moat, and doubt he would want to swallow the tax bill of >4+B on the gains!
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If BRK doesn't need the cash, why sell?

I think WEB loves his cherry coke, so as long as he like coke, why would he sell? He has a shareholder base that is not going to hold him responsible.
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Let's see if KO gets embroiled in a scandal :-)

If past is any guide, he will defend the management in public, provide air cover, abstain from voting. He has a shareholder base, that adores the management. They will look past. Especially now, given most folks realize there are only few years left for WEB.

You can protest by selling your shares. I am sure WEB will discuss the impact of shareholder protest when he meets for dinner with his "special" investor base.
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No. of Recommendations: 7
Don’t see WEB selling on his watch-he’s very loyal, has low growth, but steady earnings/ dividend, international moat, and doubt he would want to swallow the tax bill of >4+B on the gains!

True.
Mr Buffett isn't wholly married to old beloved positions, as seen by the Wells Fargo sale.
But the deciding factor for now would likely be the lack of the need for cash.

But always invert. In this case, consider the endowment effect.
If we didn't already own the shares, would we buy them today?

The after tax proceeds of a sale would be about $44 per share.
If Berkshire had $44 per share or $17.6bn in cash sitting there instead of the stock, would they use it to buy 400 million shares of this company now?
I think not.

Earnings have been in the $1.50 to $2.00 per share range for ages.
Average rolling real EPS $1.82 since mid 2007 ignoring two big one-off items. If you run a trend line through them, it's a slight downward slope despite the buybacks.
So cash proceeds would correspond to being a seller at a cyclically adjusted P/E just over 24.
Maybe Coke earnings will be in the $2.00 to $2.50 range in upcoming years if things go better for them, but that isn't enough to make it tempting.

Buying at those prices you expect to get something with an expectation of growth. And pretty decent growth, too.
As Mr Buffett noted, if you're not getting an earnings yield of at least 7% on what you buy,
then the future earnings have to be that much higher to make up for the period that you don't get it.
So buying at $26 might make sense. Maybe a bit more than $24 if you expect growth for some reason. But not at $44.

Jim
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No. of Recommendations: 3
Business bad? Last Qtr: "Our Q1 organic revenue was up 6%

It's pretty easy to look good when comparing to a quarter when the world economy was shut down.
Including most of its bars and restaurants.
In that context, a 6% bounce sounds scarily bad.

How are concentrate volumes compared to 2 or 5 years ago?

Jim
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The equivalent multiple for Dollar Tree might be in single digits right now.
That threshold would require their earnings per share to rise at least inflation+6.6%/year, which I think they will beat.
So I'd be "pretty darned sure" of a good outcome from here.


Sounds like Dollar Tree (DLTR) might be a good candidate for some LEAPs then? The January 2023 LEAPs look like this right now:

strike   Bid    Ask   Execution  Breakeven  Premium  Borrow  Raw Int  Annual  Leverage    current quote
100.23
45 54 59 57.75 102.75 2.52 42.48 0.0593 3.73% 1.74
50 49.5 54.5 53.25 103.25 3.02 46.98 0.0643 4.04% 1.88
55 45.45 49.65 48.60 103.60 3.37 51.63 0.0653 4.10% 2.06
60 41.15 44.9 43.96 103.96 3.73 56.27 0.0663 4.17% 2.28
65 37.9 39 38.73 103.73 3.49 61.51 0.0568 3.57% 2.59
70 32.1 34.8 34.13 104.13 3.90 66.11 0.0589 3.70% 2.94
75 30 30.9 30.68 105.68 5.44 69.56 0.0783 4.92% 3.27
80 25.05 27.25 26.70 106.70 6.47 73.53 0.0880 5.53% 3.75
85 21.95 23.85 23.38 108.38 8.15 76.86 0.1060 6.66% 4.29
90 20.4 20.75 20.66 110.66 10.43 79.57 0.1311 8.24% 4.85
95 17.15 19 18.54 113.54 13.31 81.69 0.1629 10.23% 5.41


Maybe a tad of the 45s and 65s?

Tails
(Execution price is .75 of the way between the Bid/Ask)
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No. of Recommendations: 4
Reminds me a little bit of McDonald’s in 2002 in some ways (health concerns and poor management). Sales were declining. Saturation. Health concerns. At $12 per share MCD had a very low PE. (It’s $234 today!

My wife nixed my purchase recommendation twenty years ago because of those health concerns. Big mistake.
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No. of Recommendations: 9
Sounds like Dollar Tree (DLTR) might be a good candidate for some LEAPs then? The January 2023 LEAPs...

I picked up some of those.
Which some might see as a contrarian indicator.

So if I'm going to be out on a limb, I might as well make a forecast.
Let's pencil in a return for DLTR stock without leverage of 12%/year for the next 3-5 years.
No specific justification, but I like the numbers 8 and 5:
Think of it as 8.5%/year growth to about $8.50 EPS around four years out and an average P/E of 18.5 for the medium term.
With today's price at $100.32 and no dividends visible on the horizon, I'll pencil in an average market price July 2024-June 2026 of $158. (another 8 and another 5)
Optimistic, but what the heck.

For comparison, my medium term forecast for Berkshire starting at today's price is inflation+ 7.3%/year for the next 3 years.
That would be a target of $508,200 in today's dollars for the average price 2-4 years from now. (CPI 269.2)

Jim
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