Shares of beverage giant Coca-Cola Amatil (ASX: CCL) rose 22% over the last 12 months vs. a 12% rise in the ASX 200 (^AXJO) over the same period. Is this outperformance likely to continue and should investors drink up? Here are three compelling reasons why investors may want to say ‘bottoms up’ when it comes to Coca-Cola Amatil.
1. The fizzy drink business is solid
Coca-Cola Amatil operates a business that Australians know and love. Namely, this nearly $11 billion, 110 year-old company owns the rights to produce, bottle and sell an array of beverages from Diet Coke to Lift, Fanta and Powerade, Maker’s Mark and Jim Beam. It has an impressive distribution network and a considerable installed fridge base across Australia, New Zealand and parts of the South Pacific.
Such a solid business has deep appeal for long-term, buy and hold investors. For instance, Warren Buffett has been buying up shares of the U.S. Coca-Cola company (NYSE: KO) since 1988. It’s been a winning strategy for the Oracle of Omaha. Since January 1, 1988, KO shares have appreciated a whopping 2,500%, inclusive of dividends, and the company is now one of Berkshire Hathaway’s (NYSE: BRK-B) largest holdings.
2. Indonesia, beer, and prospects for future growth
While Coca-Cola Amatil’s operations are concentrated in Australia, the company’s greatest source of growth is its Indonesian and Papua New Guinean operations, which saw volumes increase by 12.9% through the first half of 2012, with EBIT growing even faster, at 19.3%. With a strong foothold in these quickly growing economies, CCL’s sales in the region are poised to grow for years to come.
Closer to home, Coca-Cola Amatil is soon to reenter the domestic beer business through a joint venture with Yellow Tail winemaker Casella. Through the venture, known as Australian Beer Company, Coca-Cola Amatil is poised to capture as much as 15% of the total Australian premium beer market from December 2013 onward. All this suggests brighter and bigger days ahead for Coca-Cola Amatil.
3. Blue chips just don’t come cheap
While CCL shares dipped recently – pulling back toward $13 mark in mid-December from highs topping $14 in October, today’s price is still within shouting distance (whispering distance, even) of the 52-week high. This should come as no great surprise.
It’s not often you get a blue chip for a bargain price, and at present, shares of Coca-Cola Amatil are no exception to the rule. Trading at an enterprise value to EBITDA ratio of 14, Coca-Cola Amatil shares don’t appear to be cheap, but neither do they appear to be wildly expensive, given the company’s growth prospects. This leaves investors the option of waiting for another pullback or, better yet, averaging into a position over time.
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Motley Fool contributor Catherine Baab-Muguira has no financial interest in any of the companies mentioned here. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.