1998: What are Coke's key performance indicators?

AUDIENCE MEMBER: Nat Chase (PH), Houston, Texas.

My first question’s on the quality of earnings and your evaluation of quality of earnings in the U.S. right now.

And the second is, what multiples should be put on asset gains such as sale of bottling assets or reversal of merger reserves? Thanks.

WARREN BUFFETT: Yeah, well, taking the second question, for example, with Coca-Cola, the bottling transactions are incidental to a long-term strategy which, in my view, has been enormously successful to date, and which has more successes ahead of it.

But in the process of rearranging and consolidating the bottling system, and expanding to relatively undeveloped markets, there have been, and there will be, a lot of bottling transactions. And some produce large gains. Some produce small gains. I ignore those in my evaluation of Coke.

The two important elements in Coke are unit case sales and shares outstanding. And if the shares outstanding go down and the unit case sales advance at a good clip, you are going to make money over time in Coca-Cola.

There have been transactions where people have purchased rights to various drinks. Coca-Cola’s purchased some of those around the world. And when you see what is paid for a million or 100 million unit cases of a business, and then you think to yourself that maybe Coke will add a billion and a half cases a year, that’s a real gain in value. It’s a dramatic gain in value.

And that is what counts, in terms of the Coca-Cola Company. If you think the Coca-Cola Company’s going to sell some multiples of its present volume 15 or 20 years from now, and you think there’ll be a lot fewer shares outstanding, you’ve gone about as far as you need to go. But I would pay no attention to asset gains. I would just take those out of the picture.