Dear Mr. Berko:
I have nearly $5,100 to invest in my Roth IRA. My broker suggested either Best Buy or Coca-Cola. I'm leaning toward Best Buy because I think Coca-Cola's new Coke Life will be a flop.
-KD, Wilmington, N.C.
Dear KD:
Best Buy (BBY-$39) is a $42 billion-revenue big-box store with 1,750 locations in the U.S. and Canada. BBY has no preferred stock or pension plan obligations, only $1.6 billion of debt, a book value of $13.20, a market cap of $12 billion and only 350 million shares outstanding.
I like BBY because I can troll the aisles of a BBY store-toying with the digital cameras, admiring the big-screen TVs, playing with the computers, fussing with the audio equipment and testing appliances-and never be bothered by a salesperson. That's just dandy because the few BBY salespeople I have encountered are dumber than a bag of hammers. That's also typical of many new hires today, who might otherwise be cooking meth, stripping copper wire and pipes from unoccupied homes, or kidnapping dogs and cats to sell for laboratory experimentation.
But I'd not buy the stock, because management, like Little Bo Peep's sheep, may have lost its way. Net profit margins-which, in the opinion of many professionals, are one of the best metrics to measure management effectiveness-have tumbled steadily, from 3.7 percent in 2004 to 2 percent last year. And the bumbling lads at BBY's classy offices in Richfield, Minnesota, can't figure out why. Ten years ago, BBY earned $37 on every $1,000 of revenue. Today management is hard-pressed to net $20 on $1,000 of sales; that's an unforgiveable 45 percent plunge. And if that weren't bad enough, revenues, which peaked at $50 billion in 2010, may have trouble reaching $43 billion this year. But can you blame it on the consumer, who earns less today than he did before the Great Recession, who has record-high credit card and installment debt of $3.2 trillion (not including home mortgages), and who's spending more on health care, food, home and auto insurance, education, car repairs, entertainment, and rent than ever before? I suggest that a 15 percent drop in BBY's revenues in four years, with a significant implosion of its net profit margins, strongly implies that management has yesterday's ice cream for brains. Most other retail giants were able to recognize the changes in the consumer's financial demographics and continued to grow their revenues. Stay away from BBY, whose management team may need an industrial-sized enema.
I like Coca-Cola (KO-$42), which back in 1886 was sold for a nickel a glass, and "the real thing" was still selling for the same nickel in 1959, though I got suckered into paying $4 for it at dinner a month ago. I like the company and the expertise of the management that has run this beverage giant for the past 20 years. I'm impressed that KO is among Warren Buffett's favorite companies and that Berkshire Hathaway owns 400 million shares, worth $16 billion. I like KO's products, which include Schweppes, Barq's, Dasani, Sprite, Fanta, Fresca, Hi-C, Mello Yello, Minute Maid, Pibb Xtra, Inca Kola, Powerade and many more nonalcoholic beverages. In the past 10 years, capable management has doubled revenues to $46 million, doubled earnings to $2.03 a share, doubled the dividend to $1.22 (yields 3 percent) and doubled shareholder value.
I agree with your perception of the "mid-calorie" Coke Life, which is supposed to appeal to those who don't like the taste of Diet Coke. Its taste is fine, but that army-green bottle, designed by marketing expert Darrel Rhea, is off-putting. KO's Coke Life may be another marketing blunder. But management usually turns its blunders into learning experiences. And KO, with its enormous financial clout, often teams up with other fast-growing segments of the beverage industry, taking positions last year in Keurig Green Mountain and Monster Beverage.
Coke is a no-brainer for a conservative growth and income stock. There will be short-term disappointments, but this is a good long-term stock.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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Published: Tue, Feb 24, 2015
