09 Apr 2010 Yacktman Funds - Q1 2010 Commentary ( Portfolio )
Identifying great companies is not especially difficult. Appraising the future prospects of a business and paying an appropriate price are far more critical to generating attractive returns and managing risk than just picking leaders.

In each fund, six of the top ten positions (News Corp, Coca-Cola, Microsoft, Viacom, Pfizer, and Comcast) today trade at price levels below their close at the end of 1999, even though each of the six businesses has grown its sales and earnings per share (in most cases substantially) in the last decade-plus. We did not own any of these six poorly performing stocks in either fund back in 1999, but have been happy to purchase and own them in the last few years at much more attractive prices. We like to buy quality merchandise when it is in the discount bin.

Shares of Coca Cola declined slightly during the first quarter, and are attractively priced, especially given low level of risk we see for the business. Over time, emerging markets represent a significant opportunity for growth. In 2009 the volume gains in China, India, Mexico and Brazil were equivalent to the total volume of Coca-Cola’s sixth largest market, Germany.

We are often asked how we expect to get market-beating returns owning consumer staple securities like Coca Cola. Here is how we look at it. Coca Cola should earn approximately $3.40 this year. After making investments for growth, we expect the company to generate about $3 per share that it can use however it chooses. Based on the current share price, this equates to a free cash yield of approximately 5.5%. Over long periods of time we would expect the company to grow volume at 3-4% per year and raise prices by a couple of percentage points annually to nearly keep up with inflation.

In total, this gets us to a double-digit annual expected rate of return assuming the shares sell at a similar multiple of earnings/cash flow compared to today. Given the high degree of confidence we have about the business, this is a solid investment opportunity in the current environment.

Some think if an investment idea is well-known and seems obvious it can’t be really good. In 1938, Fortune Magazine concluded “Several times every year, a weighty and serious investor looks long and with profound respect at Coca-Cola's record, but comes regretfully to the conclusion that he is looking too late.” Since that time, Coca-Cola has grown significantly both domestically and around the world. It was not too late in 1938, and we believe it is far from that today.