So far in 2014, Coca-Cola Amatil Ltd (ASX: CCL) ("CCA") has failed to impress investors, with shares down a gut-wrenching 25%.
Looking further back, it's doesn't get much better. Since the beginning of September 2009 (approximately five years ago), its share price has remained depressed, down 8.50%.
Although since then the company recommenced paying dividends (after holding out on investors for around three years during the GFC), CCA shares have clearly underperformed the broader S&P/ASX 200 (INDEXASX: XJO), which is up 25.6%.
In fact, over an entire decade, CCA's share price has failed to beat the market.
What's changed in 2014?
I've been told, the four most dangerous words in investing are: "This time it's different."
However could CCA be about to turn a corner and reverse the trend?
Yes, its 2014 half-year report wasn't good and showed falling profits, weaker margins and a bleak outlook for the immediate future. Dividends could also come under pressure in years ahead.
Newly installed CEO, Alison Watkins said: "It is clear that CCA is facing a number of immediate challenges, particularly in the Australian beverage and Indonesian markets."
In response the management team has launched a strategic review which aims to save $100 million over the next three years. Given the group's half-yearly profit was $182.3 million, the savings would be quite significant.
So the question for potential investors is: Is it worth the risk?
Can Ms Watkins and her management team grow the company's bottom line (profit) enough for its stock price to beat the market from here on?
The risks
CCA faces a number of headwinds which are beyond its control. Some of these include:
- Competition. While this should be nothing new to CCA, intense competition is evident in all areas of its business. The Australian beverage business has suffered from aggressive competitor pricing and growing private label activity.
- Indonesia. In recent years Indonesia has been CCA's flagship growth prospect but a number of challenges are hindering the company's overseas revenue growth including cost inflation, currency depreciation (the rupiah has been falling against the AUD for many years) and increased competition. The latter will impact its ability to grow its EBIT margin, currently at 1.2%, to anywhere near that of the Australian beverage business, currently 16.6%. Although stronger single digits should probably be expected from Indonesia.
- Rise of 'Better for you' products. People are beginning to realise that carbonated drinks are unhealthy. Although consumer confidence may be low now, health conscious shoppers are here to stay.
Buy, Hold or Sell?
With cost cutting, improved marketing and support from The Coca-Cola Company (NYSE: KO) which has witnessed its own diluted earnings per share fall since 2010, CCA could be at a low point and ready to return to sustainable earnings growth. Thus making now a good time to buy.
However, unfortunately, history is against it and as such I believe investors shouldn't expect spectacular gains from the company in the short to medium term. I've got some exposure to the company's stock (see my disclosure below), but I'm conscious of the risks it faces in the short term.
Given the risks evident, I rate CCA as a fair investment (if there's such a thing) but not a great one.
