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Strategies & Market Trends : Buffettology
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To: BUYandHOLD who wrote (396)9/29/1998 10:52:00 AM
From: Robert Douglas  Read Replies (2) of 4691
 
Are Coke and Gillette still Buffett stocks?

During the last week both KO and G have made startling announcements of forthcoming earnings disappointments. For ordinary companies this would hardly be news, but for this pair the news is historic in nature. A week ago I broached this forbidden topic when I said:

There is one area that does still look grossly overvalued however, and could still see large percentage declines, even from the present levels… I am talking about these large consumer franchises stocks of which KO, G, and PG are prime examples. All three of these companies have been through a golden decade, one that will be impossible to duplicate in the next 10 years. During this golden decade net income as a percent of revenues has virtually doubled for all three of these companies. Revenue growth on the other hand has been non-spectacular. Now simple mathematics tells you that it was the growth of the margin that resulted in the marvelous earnings growth and it was this earnings growth that fueled the P/E expansion that drove the stock price. If you take away this margin expansion, what do you have? Slow growth companies valued at growth stock prices.

One shoe has already dropped as both KO and G have announced that unit and revenue growth is dropping. Gillette announced that revenues would actually decline in Q3 by 6-7%! The next thing I would expect would be announcements that profitability is suffering as well.

What do thread participants think? Is this purely a temporary phenomenon, perhaps related to the world slowdown, or is this more of a permanent in nature? There have been several discussions here as to when would be a buy point on both these stocks. My question is more fundamental in nature. Are these still Buffett-style stocks and would WB still buy them today?

-Robert
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