Now could be an excellent time to pick up a position in beverage manufacturer and distributor Coca-Cola Amatil Ltd (ASX: CCL) following reports that the lengthy price war between the company and its major rival Schweppes could be over.
Schweppes, which is Australia’s second largest soft-drink bottler, implemented significant price cuts to its products last year in an effort to gain market share and boost the sales of its new product Pepsi Next. The move saw CCA follow suit which took a substantial toll on the group’s margins, particularly due to the rising costs of production.
As a result, CCA was forced to lower its profit guidance for the year. The company is due to report its full-year results on Tuesday next week with analysts expecting group earnings before interest and tax to fall by 6.5% while net profit is set to fall 7.5% for the year.
However, positive signs are emerging with Citigroup reporting that Schweppes has raised its grocery store prices by 4%. The company has also cut the depth of its promotional activities, citing higher costs for distribution, aluminium as well as PET and PVC plastics. Coca-Cola has also lifted their prices by up to 6% as they anticipate a minimum 2.5% increase in cost of goods.
It is believed that Schweppes’ decision to increase prices is also in line with Asahi’s (Schweppes’ Japanese owner) targets to lift the group’s margins to 10% by 2015, compared to the 2.7% recognised in the first half of 2013, according to Citigroup.
The aggressive discounting was always only going to be short-term. Although discounting will help to achieve greater volumes, the increased volumes are not enough to offset margin losses – particularly when cost of goods are increasing.
Shares in CCA are currently trading at just $11.67, which is an incredible 24.4% below its 52-week high of $15.43. With 2013 as the obvious exception, Coca-Cola Amatil has delivered investors with consistent returns over the last six or seven years and, in addition, it has paid a generous dividend. Investors could certainly use this as an opportunity to buy discounted shares.
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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.
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