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Coca-Cola CEO seeks temporary tariff

Terry Davis, managing director of beverage giant Coca-Cola Amatil (ASX: CCL) (“CCA”), has called on the federal government to introduce a temporary tariff on imported canned goods in order to give local producers some “breathing space”.

Shares in CCA took a dramatic dive on Tuesday, falling 11% following a steep profit downgrade. Earnings before interest and tax (EBIT) before one-off items have been forecast to fall between 8-9% for the first half – a result largely influenced by the company’s poor performing SPC Ardmona business, which it purchased in 2005.

The high Australian dollar, changing consumer preferences and immense pricing pressures from supermarket giants Woolworths (ASX: WOW) and Wesfarmers’ (ASX: WES) Coles division are amongst the reasons behind SPC’s woes.

Coles managing director Ian McLeod recently criticised Australian retailers for their high prices compared to those sourced from the Asian market – a claim that Davis dismissed by highlighting the steeper wages paid to Australian workers. “Do we want an environment where we pay our workers $1.50 an hour? Of course we don’t”, as quoted by The Australian. Higher rents and other overheads also contribute to the higher costs of production in Australia.

Recognising the financial damage being inflicted on local companies, Davis revealed that CCA had requested a temporary tariff be imposed by the government on imported canned tomato and processed fruit products. Under the World Trade Organisation rules, temporary tariffs may be imposed when significant damage could be caused to local companies as a result of an influx of cheap products.

CCA’s request for a temporary tariff however, is only the third in Australia’s history, and neither of the previous applications have been successful, showing that the government will not impose the tariff lightly.

Whilst EBIT has been downgraded for the first ha;f, CCA is anticipating a flat EBIT result for the full year. For this to be achieved, a spark will need to fire SPC’s performance through the traditionally better performing second half.

Foolish takeaway

Based on the government’s dismissal of two prior requests for temporary tariffs by other companies, it looks unlikely that CCA’s application will be approved. The current share price reflects the market’s pessimism towards the near future for the company, however, it seems that investors are not taking into account the company’s bright future prospects. CCA is one of the strongest companies in Australia, and after an 11% fall on Tuesday, we are presented with a very good opportunity to add it to the portfolio.

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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 contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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