Warren Buffett, Coke, Earnings and the Consumer Monopoly

Building a Small Business That Warren Buffett Would Love - Available at Amazon.com

Take a look at Coke’s earnings per share for the past 10 years. Now look again. What do you see?

Coke

Year	EPS
1999	$1.30
2000	$1.48
2001	$1.60
2002	$1.23
2003	$1.77
2004	$2.00
2005	$2.04
2006	$2.16
2007	$2.57
2008	$2.49
2009	$2.93

Table 3-1

Source: Morningstar.com

Although some bumps in the road exist, in 2002 for instance earnings per share dropped from the previous year’s $1.60 to $1.23, we see a strong, steady and growing track record of earnings. Overall, for this historic 10-year period, the earnings per share for Coke have been growing at a relatively steady 13.7%. This picture of steady, consistent and growing earnings is imperative to the small business income statement if you want to build a business that Warren Buffett would love.

In the realm of small business, the earnings number will not necessarily be on a per share basis, but you can easily see the earnings picture using historic income statements or tax returns.

For example:

Year	Earnings
1999	$ 10,000
2000	$ 10,500
2001	$ 11,000
2002	$ 10,250
2003	$ 11,100
2004	$ 11,750
2005	$ 12,000
2006	$ 11,500
2007	$ 12,100
2008	$ 12,500
2009	$ 12,400

Table 3-2

Ideally, as in the case of Coke’s earnings per share, you will see an earnings level that is relatively consistent and growing over time, kind of like the general public’s resentment for Justin Bieber.

And What We Do Not Want to See …

Below is the earnings per share record for a large technology firm. Take a look at this earnings track record and note the roller coaster ride.

Year	EPS
2001	-$0.36
2002	$0.04
2003	$0.58
2004	$0.00
2005	$0.96
2006	$4.04
2007	$0.40
2008	$0.57
2009	$1.95
2010	$3.85
2011	$7.88

Table 3-3

Source: Morningstar.com

Back to the theme of predictability, although past results are not necessarily an indicator of future performance, based on the two previous earnings per share tables for Coke and the technology company, which business are you more comfortable in predicting what the earnings will do next? In other words, which company is more likely to continue producing a record of solid, growing earnings going forward: the one with the solid record of earnings or the one whose earnings chart mirrors the track layout of Space Mountain? In the world of Warren Buffett, Mr. Buffett has found that the company with the steady, growing record of earnings has a much higher degree of predictability.

Again, in twenty years is it more likely that people will be drinking Coke or using the iPhone and is it possible that we will have hover boards by then since by all appearances Mr. Spielberg, the 2015 is bullshit. (We only have 4 years left and guess what? I also don’t have a self-walking dog collar, a flying car, nor a hydrating microwave oven.)

Why This is So Important

With predictability comes a greater assurance that the business can repeat the past and has the potential to increase the overall company value. In relation to predictability, a cacophony of present valuation formulas exist that are highly dependent on a continuing earnings picture. Without predictability, these formulas fall apart and we cannot calculate the future value of the business with any sort of reliability. These details will be dissected in later chapters. Additionally, a business with earnings can potentially retain the earnings and reinvest them in high yielding projects which will continue to increase the overall company earnings and value.

Building a Small Business That Warren Buffett Would Love,available atAmazon.comorBarnesandNoble.com.

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