The Motley Fool

Could Coca-Cola Amatil Ltd shares be worth just $7.00?

An analyst from Bank of America Merrill Lynch (BoAML) has provided a rather bleak outlook for Coca-Cola Amatil Ltd (ASX: CCL) in the lead-up to an update from the company regarding its strategic review.

If you’d watched the news or opened a financial newspaper at any time over the last 18 months, you’d be well aware of the struggles facing the Australian beverage giant. Its growth prospects in the once promising Indonesian market are now being questioned, while factors such as a pricing war with Schweppes and a decline in carbonated soft drink consumption are heavily impacting its Australian and New Zealand business.

Management of Coca-Cola Amatil implemented a strategic review of its operations earlier in the year, and an outline of its plans are expected to be delivered on October 30. It’s expected that a cost reduction program will be announced with the savings to be poured into reducing prices, marketing improvements and product development.

However, BoAML analyst David Errington believes that the problems will be costly, stating (according to a report in the News Ltd media) that “the remedies required to improve CCA’s current operating performance will be costly and should cause its earnings to retrace (heavily) before growth can recommence.”

As it stands, BoAML maintains a $7 price target on the stock with an “underperform” recommendation. That reflects a further 19% downside compared to today’s price tag of $8.69 per share.

Buy, Hold, or Sell?

The analyst’s comments will no doubt spook some investors who may not be able to bear the thought of further declines. The stock has already dropped roughly 44% since March 2013, heavily underperforming the rampaging S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) in that time. And unfortunately, there is absolutely no way of knowing how low the stock will fall in the near term.

However, it’s the long term that investors should be focused on. Although Coca-Cola Amatil is facing a number of strong headwinds right now, management appears to be making all the right moves to turn the ship around, and investors who continue to remain patient should be handsomely rewarded over the coming years.

While the stock could certainly fall lower over the coming weeks or months, Coca-Cola Amatil is presenting as an excellent long-term prospect and a very decent buy.

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