Dear Mr. Berko: Should I sell my 400 shares of Coca-Cola at a small loss and buy 100 Amazon? I'm looking to invest for a seven- to eight-year time frame, and I’m not concerned about the Bezos’ divorce affecting the company. But I am impressed with Amazon’s cloud business. -- K.G., Waterloo, Iowa
Dear K.G.: I agree. I’m not concerned about the Bezos' breakup, and I’m also impressed by Amazon’s cloud business.
The city of Atlanta, known for the Peach Sliders at Revolution Doughnuts, is also home to Coca-Cola (KO-$46), the largest beverage company in the world and among the few companies accorded a financial rating of A++ by Value Line. Founded in 1886, KO markets 518 different nonalcoholic beverages, concentrates, syrups and powders via a worldwide network of company bottlers, independent bottling partners, distributors and wholesalers. Berkshire Hathaway’s fourth largest stock position, KO posted $32 billion in revenues in 2008 and posted $32 billion in revenues in 2018.
Since earning $1.91 in 2011, KO’s income has floundered, but it squeaked to a new high last year of $2.09. Nonetheless, cash flow declined in that time frame, book value fell a record 26%, and the number of shares ebbed slightly as officers and directors sold millions of shares in 2017 and 2018 in the $48 to $50 price range. And, disappointingly, not a single officer or director has purchased even one share of KO in the last two years. They know there’s a thumping amount of competition out there making life difficult for KO.
This year, KO’s management expects a 7% revenue increase to $34 billion, a 7% increase in earnings to $2.24 a share and a 7% increase in the dividend to $1.66 from $1.56. Three sevens may be good in poker, but it's not enough to encourage the gray flannel suits in KO’s executive offices to purchase the stock. Because the Atlanta lads won’t put their money where they work, they must believe KO’s potential future returns are unattractive. I suggest you follow management’s example and sell your 400 shares. On the other hand, if during one of the future market sell-offs we should have this year KO falls below $40, I’d bound in with both feet.
Amazon (AMZN-$1,842) trades at 83 times earnings, and in my way of thinking, no company is worth 83 times earnings. And for the past several years I wouldn’t have touched AMZN with a cattle prod. That kind of reasoning is old school, albeit old schools are now teaching new math. So some of us who were educated by Graham and Dodd have had to learn to make exceptions to the rule.
Last year, AMZN equal partners Jeff and McKenzie Bezos saw their company report a 31% increase in revenues to $23.8 billion, and that included hugely impressive growth at Amazon Web Services. AWS is a cloud computing platform offering computer power, database storage, content delivery and other functionalities for businesses. With $6.7 billion in quarterly revenue, AWS is twice the size of Salesforce.com, another cloud computing firm, and growing twice as fast. Brent Thill, an analyst at Jefferies, believes AWS could be worth a minimum of $350 billion in an IPO and thinks AWS’s revenues will reach $25 billion in 2020. This is AMZN’s most profitable division (56% of last quarter’s operating profits), so I doubt Jeff and Mac will upset it.
The Street believes AMZN will report a 19% to 20% increase in 2019 revenues and a 20% to 21% increase in 2021 revenues. And Thill sees AMZN’s revenues exceeding $70 billion by 2024. In the past, AMZN’s net profit margins were below 1.0%. However, during the last few years those margins increased to 4.3%, and the Street expects 6% in the outer years. Buy AMZN.
(Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com.)