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Should you buy Coca-Cola Amatil?

Coca-Cola Amatil (ASX: CCL) certainly doesn’t appear cheap at first glance. The shares are trading for a whopping 24 times earnings, or an EV to EBITDA ratio of about 12.

In just the last year, CCL shares have packed on 16%, outperforming the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO) by a couple of percentage points. This run-up begs the question of whether Coca-Cola Amatil can grow its business in line with the share market’s great expectations. Let’s weigh up the company’s growth prospects.

Move back into the beer market

In December of this year, Coca-Cola Amatil will once again enter the Australian beer market. As part of a 50-50 joint venture with Yellow Tail winemaker Casella, the company will brew premium beers for the Australian market and may also look to acquire licenses for foreign brands. Chief executive Terry Davis has stated a goal of making $50 million in annual profit from this new business line within the first five to 10 years. (Coca-Cola Amatil’s net profit totaled $460 million in 2012.)

This somewhat modest goal — the Australian beer market is thought to be worth about $1 billion in profit annually — would place Coca-Cola Amatil as the third biggest beer company by profit Down Under. It seems eminently achievable with Coca-Cola Amatil’s extensive sales force and installed base.

What’s more, the alcohol business is one that Davis (in the chair until August 2014, it should be noted) knows well. Davis was head of the wine division for Foster’s before he left that position to take up the post at Coca-Cola Amatil.

You can see Davis’ business prowess in the space with the company’s push into cider as well. As Business Review Weekly reported recently: “Davis has also created a strategic stake for CCA in the alcoholic beverages market, with a long-term exclusive agreement to distribute Sweden’s Rekorderlig alcoholic cider in Australia from January 1, 2014. Alcoholic cider is the fastest-growing alcoholic beverage category in Australia, generating sales of $550 million and increasing by 20 per cent annually.”

Still, in Australia, Coca-Cola Amatil will continue to face pressure from retailers like Woolworths (ASX: WOW) and Wesfarmers (ASX: WES) with their incredible grip on both soda and beer and liquor retail.

Prospects for growth in Indonesia

Further growth for Coca-Cola Amatil is likely to come from Indonesia. The company is adding bottling plants around the country and increasing its marketing spend significantly, with the expectation of clearing $1 billion in sales there this year, a first for the company and a figure that could keep growing for years to come.

In all, it appears Coca-Cola Amatil’s future is indeed bright. Yet much of this bright future already appears to figure in the share price. Investors may want to put CCL shares on their watch lists in the hope of a pullback.

Meanwhile, two small ASX companies with big growth prospects are trading for far more reasonable prices. Get the names and codes now in our brand-new FREE special report,“2 Small Cap Superstars”. Simply click here now, it’s free.

More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, 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.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Catherine Baab-Muguira does not own shares in any of the companies mentioned in this article.

 

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