Coca-Cola Amatil: One for the bottom drawer

The mother of all brand portfolios

a woman

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“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years,” legendary investor Warren Buffett has advised. This simple phrase has the rather magical effect of narrowing down the range of your stock ideas from hundreds to a mere handful.

With the S&P/ASX 200 (ASX: XJO) down some 10% in the last six weeks, Buffett’s advice also serves to remind us that focusing on the short term isn’t a wonderful strategy.

Which brings us to one of those few surviving ideas and a truly great business. I’m speaking of Coca-Cola Amatil (ASX: CCL), which bottles and distributes Coca-Cola and related products throughout Australia, New Zealand, Fiji, Indonesia and Papua New Guinea.

The mother of all brand portfolios

Coca-Cola Amatil has an excellent portfolio of brands which consumers across the region love. These include not just Coke, but also Fanta, Mt. Franklin, Mother (a popular energy drink – just ask the nearest teenage boy), Vitamin Water, Powerade, as well as alcoholic beverages from Jim Beam to Famous Grouse and Maker’s Mark.

The combination of brand strength and deep-seated consumer habits mean these products sell for relatively premium prices, ensuring healthy margins for the company. (One particular reason CCA stands out as a long-term investment idea is that its products maintain their premium pricing over time, beating or keeping pace with inflation. Just recall how in “Back to the Future Part II,” Marty McFly gets $50 to purchase a Pepsi in the year 2015.)

What’s more, Coca Cola Amatil’s incredible distribution network and tremendous network of ubiquitous ‘Coke fridges’ help it to control costs and remain at the forefront of the industry.

At the end of this year, Coca-Cola Amatil is set to re-enter the beer market, grabbing a likely (distant) third spot among Australian beer companies. With the total Australian beer market worth some $1 billion in total profit on an annual basis – no one ever said Aussies don’t love our beer – this small segment should prove a lucrative one.

Indonesia and Papua New Guinea also represent a significant growth engine for the company, as the citizens of these developing-world countries are consuming Coke products at increasing levels. Sales have risen over 60% since 2008 (then at $584 million), and are expected to reach $1 billion this year.

Valuation and an idea about when to buy

Coca-Cola Amatil products command a premium price, and just now, so do the shares, which are trading on a P/E (underlying) of about 17, and on an enterprise value to EBITDA basis of about 11.

This isn’t an aberration; the shares have historically traded for a rich valuation, reflecting the high-quality nature of the business. It’s worth noting that the occasional short-term gyration can offer a better moment to pick up shares. Dollar-cost averaging into a position could help you avoid paying too much of a premium over time.

Coca-Cola Amatil shares also pay a dividend with a yield in the 4.8% range.

What would take the fizz out?

Ten years from now – per Buffett’s advice – it’s highly likely Coca-Cola Amatil will still be supplying products that consumers love and making good money at it.

Still, an investment in CCL shares isn’t without risk. The company’s relationship with key retailers Woolworths (ASX: WOW) and Wesfarmers (ASX: WES) has lately been somewhat strained by a war of words between chief execs, while Coca-Cola Amatil announced a rare earnings downgrade last month. Some consumers, citing health concerns, are shunning soft drink – a trend worth keeping an eye on.

Foolish takeaway

If you’re a long-term oriented, buy and hold investor, Coca-Cola Amatil could prove a refreshing addition to your portfolio. While the shares aren’t cheaply priced today, dollar-cost averaging into a position in the company over time could offer you the chance to take advantage of market volatility and slowly but steadily build your stake. Cheers to that.

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Motley Fool writer/analyst Catherine Baab-Muguira has no interest in any of the companies mentioned.

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