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Should you buy Coca-Cola Amatil Ltd?

Coca-Cola Amatil Ltd‘s (ASX: CCL) 2013 full year result was poor, driven by difficult trading conditions in the Australian grocery channel. As a consequence, EBIT declined 6.9%, with net profit declining by 82% on the back of a write-down on the company’s investment in SPC Ardmona. Of particular concern was the performance of the grocery channel sales, which suffered an 8.2% decline in volume due to aggressive competitor pricing and retailer re-stocking.

Despite the poor result in FY13, can Coca-Cola Amatil grow earnings going forward or are its best days behind it?

Management has said that trading conditions will likely remain difficult in the short-term as a result of further competitive pressure in the grocery channel market. However, there were positives from the result. Operating cash flow was strong at $733 million, with continued strength in the balance sheet supporting the maintenance of the full-year dividend in line with the prior year. Analysts have also forecast net profit growth of 7% in respect of the FY14 year.

Coca-Cola Amatil is the dominant player in the Australian soft-drink market with an extensive distribution network and instantly recognisable brand. Whilst the Australian market is mature, the company is experiencing growth in Indonesia and New Zealand. Indonesia presents a huge growth opportunity and volume growth increased by 10% in FY13, however earnings were down in respect of Indonesia and PNG on the back of rapid cost inflation and currency depreciation. The growth in the Indonesian economy presents a huge long-term growth opportunity. The New Zealand segment also experienced 10% earnings growth for FY13.

In December 2013 the company announced a return to the Australian beer and cider market with management noting results to date have been very positive.

On the back of a poor result in the Australian market, Coca-Cola Amatil will undertake a comprehensive review of the operating cost structure in response to the competitive environment.

Foolish takeaway

Coca-Cola Amatil’s extensive distribution network and greater than 50% share of the Australian soft drink market provide the company with a strong competitive advantage. Despite a maturing Australian market, the company has opportunity to grow in Indonesia and also grow its share of the alcoholic beverage market and non-carbonated soft drink categories.

The company has a strong balance sheet and operating cash flows to use as a foundation to drive future growth. Coca-Cola Amatil has delivered compound returns of 12.5% over the past decade and I expect it to deliver strong earnings growth going forward once aggressive competitor pricing eases. At the current share price, I think this stock is a buy for long-term investors.

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Motley Fool contributor Bradley Murphy own shares in Coca Cola Amatil mentioned in this article.

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