Pressure makes diamonds, they say.
Well it's also true that pressure makes coal, and the market pressures facing Coca-Cola Amatil Ltd (ASX: CCL) are forcing the company to decide whether it will turn into a diamond or coal over the next decade.
If you'd sold the company at its peak in early 2013 after holding it for 10 years, you would have enjoyed roughly a doubling of your share price plus a further 40% in dividends.
If you sold today, you would instead get only 20% capital gains plus some 43% in dividends.
However 'past performance is no indication of future performance', and investors must be wondering how Coca-Cola will be shaping up for the next 10 years.
Analyst Morningstar is pessimistic, having affixed an $8.50 'fair value' price target to Coca-Cola.
Further, Morningstar says that Coca-Cola can no longer be considered a defensive stock, rather a business with average cyclicality despite still enjoying an economic moat.
Part of the problem is Coca-Cola's inability to push price increases through to consumers, with customer preferences tending towards lower-cost Pepsi products.
Coca-Cola has been forced to battle volume decline with heavy discounting, which has impacted margins and thus profitability.
Add in restructuring costs associated with SPC Ardmona and it's easy to see why Coca-Cola has fallen out of favour in the eyes of the market, dropping 40% in the past 18 months.
However there are several advantages that I think analysts are overlooking which could prove key to Coca-Cola's ability to turn the situation around.
- An economic moat
Coca-Cola Amatil is still the supplier of choice for a majority of Australians – consumers, restaurants, fast food chains, sporting clubs, and so on.
With a more efficient supply chain, better marketing and improved consumer research, Coca-Cola could easily leverage its network of buyers to return to profit and volume growth.
- Experienced management
Ms Alison Watkins, former CEO of Graincorp Ltd (ASX: GNC) joined Coca-Cola Amatil as Managing Director back in March last year.
However former incumbent Mr Terry Davis worked out the remainder of his notice period and only formally left his position less than two months ago.
With the departure of Mr Davis after his advisory period, Ms Watkins assumes independent responsibility, and investors should begin to see her expertise flow through to company improvements.
- Restructure potential
Asides from the already announced $100 million savings target, Coca-Cola has the potential to rejuvenate its brand with new products and marketing.
I would prefer to see new products tailored to changing consumer preferences, but there's no denying that clever marketing strategies like 2012's Share a Coke campaign have amazing potential to raise brand awareness and sales.
An investment in Coca-Cola is a long-term venture, and given the obvious robustness of the parent brand over the past century, I find it highly likely that Coca-Cola Amatil will be able to bounce back to deliver another decade of strong performance.
