The Coca-Cola Company (TCCC), one of the world's most respected businesses, is currently facing some tough decisions.
Despite well over 100 years in operation, a rise of health conscious consumers continues to weigh on fizzy drink sales, according to The Australian Financial Review.
To the nine months ended September 26 2014, US-based TCCC witnessed a 7% fall in earnings per share and 2% drop in sales.
In response the company is expected to cut between 1,600 and 1,800 jobs, reduce can sizes, remove $3 billion of costs and introduce a new green-labelled "natural" soda to try and slow the falls.
Chief executive officer, Muhtar Kent, said: "We continue to face a challenging macroeconomic environment," yet acknowledged the company is still on track to meet its long-term goals.
Closer to home, our very own Coca-Cola Amatil Ltd (ASX: CCL) ("CCA") is having troubles of its own.
The following three-year share price chart says it all…
Source: Google Finance. Click to Enlarge.
CCA has the exclusive license to bottle and distribute Coca-Cola products to Australia, New Zealand, Indonesia, Fiji, PNG and Samoa. In return TCCC owns 29.2% of CCA.
After failing to meet growth expectations in 2013 and in the wake of a big fall in profit in early 2014, CCA issued an update in April stating group EBIT (earnings before interest and tax) would decline around 15% in the first half of 2014, over the comparable period.
According to a company update in October, "difficult trading conditions" in the Australian beverage business – which accounts for nearly 60% of group trading revenue – resulted in a 14.1% earnings decline within the division.
In addition the company stated: "Promotional activity yielded disappointing results and rate realisation continued to be under pressure due to weaker consumer demand, aggressive competitor pricing and private label activity in both water and flavoured carbonated beverages."
In PNG and Indonesia (the latter is often heralded as the key growth market for the company) volume grew 22% but EBIT fell to just $5.2 million, from $31.4 million a year earlier.
Recognising the potential of the country, TCCC recently announced it would invest $US500 million in CCA's Indonesian business to help win over the fiercely competitive market.
Is CCA a bargain?
Coupled with the above, uncertainty around its SPC Ardmona tinned fruit business, which booked $400 million in write-downs last year, as well as competition from supermarket giants Coles – owned by Wesfarmers Ltd (ASX: WES) – and Woolworths Limited (ASX: WOW) make it tough to put a precise value on CCA shares.
However if you believe we are entering a new normal – characterised by falling fizzy drink sales and a more health conscious society – a very conservative estimate suggests fair value is around $10.37 per share (currently shares trade around $9.30). Whilst this is far from a comprehensive analysis, it implies a very thin margin of safety.
If however the company can begin to return to modest EBIT growth in 2015 (after a fall in 2014) by maintaining strong margins and slightly expanding the top line, fair value could be as high as $14.00 per share.
Given the wide range, I believe fair value probably lies somewhere between these two figures. Implying a satisfactory upside.
So whilst the industry could be in structural decline over the long-term; a depressed share price, world-renowned brand, strong earnings track record, backing from TCCC and a forecast 4.4% partially franked dividend yield are all pointing towards CCA being a sound investment at today's prices.
