Investors have long been divided over Coca-Cola Amatil Ltd (ASX: CCL). On the one hand, you've got the obvious factors such as falling sales volumes, rising costs and, ultimately, diminishing profits. But on the other, you've got a company with world-class brands and an arguably very bright future ahead of it.
This divide was on true display when the company reported its full-year earnings on Tuesday, announcing a 25.3% decline in underlying earnings on the back of a 1.9% decrease in trading revenue. Yet the shares rose more than 6% for the day with the company offering an optimistic outlook for the coming years.
The Issues
Coca-Cola Amatil's core Australian market continued to suffer with earnings from the division slipping a painful 21.3%. Sales and volumes have both been falling in recent years as a result of heavy competition from Schweppes and pricing pressures from the supermarket behemoths, namely Woolworths Limited (ASX: WOW) and Coles, owned by Wesfarmers Ltd (ASX: WES).
Earnings have suffered in the Indonesia and PNG (Papua New Guinea) region, too. While the businesses delivered strong volume growth and gained market share during the half, "rapid cost inflation, currency depreciation and increased competition" continued to impact earnings.
To top things off, investors are also concerned with changing consumer health trends which could impact the popularity of the Coca-Cola brands in the medium term.
Here's why Coca-Cola Amatil Ltd is still a buy
Although it was a poor (but expected) report as far as earnings are concerned, there were many positives to take away from the commentary.
Coca-Cola Amatil's new Managing Director, Ms Alison Watkins, confirmed that "concrete progress has been made in implementing strategies to strengthen the market leadership position of the Company in two major markets, Australia and Indonesia." The company will aim to reduce costs by $100 million over the next three years while its focus will be reoriented towards greater marketing and 'good for you' products which should boost the brand's strength and earnings over the coming years.
Meanwhile, shareholders of the business overwhelmingly voted in favour of selling 29.4% of the Indonesian business to parent entity The Coca-Cola Company, which will see US$500 million invested in the business. Although this will reduce the portion of the business' profit that Australian investors are entitled to, it could significantly improve overall returns in the long run.
Indeed, the issues facing the company are real, but the future is certainly looking brighter. The shares have retreated to $10.20, down from $10.95 on Wednesday, and patient long-term investors should view this as an opportunity to buy a high-quality corporation at an outstanding price.
An even better bet than Coca-Cola Amatil Ltd
