Brighter days ahead for Coca-Cola Amatil Ltd

Coca-Cola Amatil (ASX: CCL) manufactures and distributes carbonated soft drinks, bottled water, sports and energy drinks, fruit juice, flavoured milk, coffee and packaged fruit and vegetable products.

The company is the principal Coca-Cola licensee in Australia and independently manufactures its own soft drinks and mineral waters. It also sells and distributes premium spirits, such as Jim Bean. In addition to Australia, it operates throughout New Zealand, Indonesia, Fiji, Samoa and Papua New Guinea.

As well as soft drinks, the company produces the number one bottled water brand, Mount Franklin, and the number one sports beverage, Powerade Isotonic. It is the market leader in non-sugar colas with Diet Coke and Coca-Cola Zero. Low and no-sugar beverages are a high growth part of the portfolio, growing at more than three times the rate of sugar-sweetened beverages in 2012.

In December 2013, the company entered the premium wine market in Australia with a joint venture with the Casella Group. The Yellow Tail brand of wine has come a long way since Filippo and Maria Casella began growing grapes at Yenda in the Riverina region in 1969. Today, Yellow Tail is the number one imported white wine and the number one red wine in the U.S., the largest wine market in the world.

Coca-Cola Amatil’s key strategy is to continue to grow the Australian beverages market. It is also investing heavily to increase fridges in Indonesia, where strong GDP growth coupled with a large population and low penetration suggest good long-term growth potential. The alcoholic beverages business is another attractive growth avenue.

Project Zero cost reduction program is a key contributor to profit growth. Here $450 million is being invested in PET bottle packaging. This project is aimed at 15% reduction in bottle weight, resulting in 50,000 truck movements per year being eliminated by end 2015.

Acquisitions have played a key part in diversification for the company. Neverfail was acquired for $225 million in April 2003 and SPC Ardmona was acquired for $524 million in early 2005.

Despite negative sentiment in the press recently, Coca-Cola Amatil’s subsidiary SPC Ardmona has had positive developments with the recent Victorian government grant and the private-label supply deal with Woolworths (ASX: WOW). Late last year SPC Ardmona had also made arrangements with Wesfarmers (ASX: WES) subsidiary Coles for supply of its canned fruit from its Goulburn Valley growers, replacing previously imported products.

Foolish takeaway

Coca-Cola Amatil is selling at the lowest price is has been for 12 months at just over $11.

Trading was impacted last year with the high Australian dollar enabling competitors to adversely affect its sales. However, it now appears that the Australian dollar will be below last year’s levels, which is good news for Coca-Cola Amatil. Other salient factors that will play into its favour are product range expansion and the cyclical upswing occurring in countries in which it operates.

Yielding 5.1% with a strong return on equity of 29% last year, I believe Coca-Cola Amatil is attractive as a buy at up to $12 for the long term investor. This is a share that can be bought today at a bargain and kept as long as you like.

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Motley Fool contributor Chris Koenig does not have shares in any of the companies mentioned. 

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