Warren Buffett’s investment in Coca-Cola (NYSE:KO) has been outstanding for Berkshire Hathaway since 1994. And there’s a FTSE 100 stock that I think has a lot of similarities.
It’s Games Workshop (LSE:GAW) – a stock I hold in my portfolio. There’s just one thing that’s holding me back from buying more at the moment, but maybe this is a mistake.
Brand power
The risk with stocks like Coca-Cola and Games Workshop is that nobody strictly needs their products. In other words, there’s no reason people have to buy anything they make.
There’s no disputing this risk, but it hasn’t held Coca-Cola back over the years. The strength of the firm’s brand means customers don’t want to trade down – even at lower prices.
Games Workshop has a similarly strong brand and its intellectual property means its products can’t be copied exactly. Its customer base is loyal, but it is niche and this is a risk to be aware of.
The strength of these assets shouldn’t be underestimated. While its products are discretionary, its customers have proved remarkably resilient, even during economic downturns.
Capital light
Coca-Cola’s asset-light business model is another big advantage. Outsourcing its bottling operations to local franchisees means it doesn’t have to invest in manufacturing facilities.
This allows it to return its cash to shareholders via dividends and Games Workshop is also outstanding in this regard. The firm regularly distributes most of its net income to investors.
Importantly, this hasn’t come at the expense of growth. Over the last 10 years, earnings per share have compounded at an average of over 30% per year, which is extremely impressive.
According to Buffett, a wonderful business grows while distributing cash to shareholders. And Games Workshop fits that description better than any UK stock I can think of.
What’s not to like?
As I said, I hold Games Workshop shares. But I haven’t been buying it recently because I don’t think it looks especially cheap at a price-to-earnings (P/E) ratio of 29.
Am I being too cautious? Buffett has said the underlying business is more important than the share price and to some extent, this is illustrated in Berkshire’s Coca-Cola investment.
Buffett started buying Coca-Cola shares in 1988 when the stock was recovering from a market crash. But the Oracle of Omaha didn’t stop buying even when it was 200% higher in 1994.
The company’s durability and growth potential meant it was still a good investment even as the share price was rising. And maybe I should take a similar view with Games Workshop.
Investing like Buffett
As Buffett prepares to retire from Berkshire Hathaway, the investing world has a lot to look back on. And I’m trying hard to listen to the Oracle of Omaha’s advice with my own investing.
The high valuation does bring genuine risks. It means there isn’t much scope for anything to go wrong with a disappointing product launch or an update.
The underlying business is still growing strongly and its competitive advantage seems to be firmly intact. And that combination has been a winner for Buffett with Coca-Cola.
