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3 reasons I would avoid Coca-Cola Amatil Ltd at this share price

Credit: Bill Dan

The Coca-Cola Amatil Ltd (ASX: CCL) share price is down by 13% compared to a week ago, but I still don’t think it’s a buy.

Coca Cola Amatil is the entity responsible for selling products like Coca-Cola, Fanta, Jim Beam, Midori, Mount Franklin and Pump in Australia.

Warren Buffett may be a huge fan of Coca-Cola in the US, but I think there are at least three reasons to worry about the future for the Australian listed entity:

Supermarket pricing power

Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) have used their position of power over the years to bargain strongly with suppliers.

Coca-Cola Amatil has found it difficult to increase prices in this era of low inflation and supermarket power. I wouldn’t be surprised to see this trend continue for a while to come.

Store brand products

Aldi, Woolworths and Coles have successfully managed to create their own brands of food and cola drinks, offering them to customers at a much cheaper price.

There is still a large demand for the original brand-name product, but with household budgets under pressure people are willing to try a cheaper brand.

Losing market share is bad for Coca-Cola Amatil because it puts even more power in the hands of the supermarkets and competitors.

Sugar

There has been a growing movement of condemnation regarding products that have high levels of sugar. A lot of Coca-Cola Amatil’s products are known for sugar, although it does have other sugarless products such as Coke Life which is sweetened with stevia.

I think creating more products with stevia, or at least having little sugar, is the best chance of developing profitable new product lines.

Consumer preferences have changed over the decades and it’s fairly easy to predict that diets will be different again in 20 more years.

Foolish takeaway

It’s currently trading at 16.6x FY17’s estimated earnings with a partially franked dividend yield of 4.91%.

Coca-Cola Amatil is a well-run business with a number of instantly recognisable brands. However, I think it’s going to be hard for the company to materially increase profit over the coming years without introducing healthier options.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Wesfarmers Limited. Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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