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Coca-Cola Amatil Ltd triples profit: Is the stock a screaming buy?

Shares of Coca-Cola Amatil Ltd (ASX: CCL) surged nearly 6% early in today’s session after the beverage manufacturer released its full-year earnings results to the market. The stock climbed to $10.55 which is its highest price since April last year.

In comparison, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has retreated 0.4% for the day at the time of writing.

So What: Coca-Cola Amatil reported a massive 240.6% increase in net profit to $272.1 million for the year ended 31 December 2014, compared to the $79.9 million reported in 2013. However, underlying earnings (which excludes one-off charges) declined by 25.3% to $375.5 million on the back of a 1.9% decrease in trading revenue, to $4.94 billion.

The Australian beverage business weighed on the result, with earnings from the division slipping 21.3%. While this has been heavily impacted by a retail price war with Schweppes which has affected sales and volumes, Coca-Cola Amatil said an increase in marketing and a heavy reduction in business costs should help swing the momentum in 2015.

Coca-Cola has also suffered from pricing pressures exerted by supermarket giants Woolworths Limited (ASX: WOW) and Coles.

Although, Group Managing Director Ms Alison Watkins has even forecast a return to profit growth this calendar year (for the first time in two years), and is targeting mid-single digit earnings per share (EPS) growth over the next few years. This is consistent with her forecasts provided in a company market update in October last year.

Watkins said: “Concrete progress has been made in implementing strategies to strengthen the market leadership position of the Company in two major markets, Australia and Indonesia, which we believe will enable us to return to growth and generate attractive and sustainable returns for our shareholders over the next few years.” This will partially be driven by a $100 million reduction in annual costs, which the company is targeting over the next three years.

Investors will meet on Tuesday afternoon to vote on the proposed sale of a 29.4% stake in its Indonesian business to parent entity The Coca-Cola Company for US$500 million, which would also be used to drive growth in the area.

Here are some of the other highlights of the report:

  • The company declared a 22 cent per share final dividend (franked to 75%), taking its total dividend for the year to 42 cents per share.
  • Strong volume growth in Indonesian and PNG businesses, with market share gains across key categories
  • Cost inflation is still weighing on Indonesian division’s earnings
  • New Zealand and Fiji earnings up 6.7% in Australian dollars
  • Alcohol, Food & Services earnings down 7.4%

Now What: The issues facing Coca-Cola Amatil will by no means have a quick fix, but management has almost certainly identified the right ways to turn the ship around. The company will focus on rebuilding brand equity whilst also innovating towards “better for you” products over the next few years, which could help boost earnings significantly.

In my opinion, Coca-Cola Amatil represents a fantastic buy at today’s price, but there’s another stock which could deliver even greater returns over the coming years.

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Motley Fool contributor Ryan Newman owns shares in Coca-Cola Amatil Ltd and has a financial interest in The Coca-Cola Company. You can follow Ryan on Twitter @ASXvalueinvest.

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