Is Coca-Cola Amatil Ltd worth your money?

It’s been proven that buying high quality companies when they’re trading at reasonable prices is the best way to build your wealth. Indeed, it’s the method that legendary investors like Warren Buffett and Benjamin Graham used to build their own personal fortunes.

While it’s rarely difficult to find a high quality company, it becomes more difficult trying to find them when they are trading at a reasonable price. That is especially the case when the benchmark S&P/ASX 200 (INDEXASX: XJO) is trading near its highest point since the Global Financial Crisis.

However, there is one stock in particular that is currently standing out from the crowd as a very attractive buying opportunity, and that is beverage manufacturer Coca-Cola Amatil Ltd (ASX: CCL). After trading as high as $15.43 in March 2013, the stock has since fallen more than 41% to just $9.02 – just six cents higher than its five-year low.

So, why is it so cheap?

While it is very rare that investors get the opportunity to buy such a great company at such a bargain price, there is a catch. Coca-Cola Amatil’s leading position in the Australian beverage market is being challenged by primary rival Schweppes with the two engaged in a fierce pricing war. This is not only impacting the company’s margins but also its shelving space in the supermarkets.

Add in rising costs, a high Australian dollar and pressures from Woolworths Limited (ASX: WOW), as well as inflation in Indonesia (the company’s primary growth region) and Coca-Cola Amatil’s profits have come under enormous pressure. In fact, net profit fell by 15.6% for its most recent half and management has warned that the tough conditions are to continue through the second half too.

Here’s your opportunity

While these issues have understandably seen many investors jump ship, the long-term investors are recognising the opportunity of a lifetime. While I’m certainly not expecting a quick fix, I do believe these issues will be predominantly limited to the short-term and that there is a bright future ahead.

Firstly, it should be noted that while Coca-Cola is being hit by the pricing war, Schweppes hasn’t been left unscathed. Although Schweppes is winning market share, the company is also experiencing higher costs and lower margins.

Secondly, Coca-Cola Amatil’s new management team, led by Managing Director, Alison Watkins, is engaged in a strategic review which will aim at cutting out $100 million in costs over the next three years. These savings can be put towards price cuts, better marketing campaigns and product development. All of which will strengthen Coca-Cola Amatil’s position moving forward.

In addition, the company maintains a strong balance sheet which allowed it to maintain a strong dividend, albeit slightly lower than in the same period last year. The company is forecast to pay a total dividend of 45 cents per share (cps) in FY15, implying a 5% dividend yield, franked to 75%.

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Motley Fool contributor Ryan Newman owns shares in Coca-Cola Amatil Ltd.

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