Is Coca-Cola Amatil Ltd (ASX: CCL) really a turnaround story to buy into?
The exclusive Coca-Cola drink bottler and distributor for Australia and four neighbouring countries has rallied about 24% in share price over the last five months. Following company expectations of earnings declines, full-year net profit came in 21.3% down.
The stock popped up after the earnings release. Now that the worst of the news is out of the way, the restructuring program becomes front and centre for investors. So is Coca-Cola Amatil worth the wait?
Good points
— Dividend yield: The stock offers a 4% yield partially franked. The full-year dividend fell along with earnings, but Coca-Cola Amatil has maintained its rather high percentage of earnings paid out as dividends. Future earnings improvement could see satisfying dividend growth.
— Return on Equity: Earnings may be down, but the company still generates a reasonably good return on equity over 22%. That's well above the market average and points to the company's unique business in being related to arguably the world's best-known brand name and most popular soft drink.
— Stronger position in energy and wellness drinks: The company has some successful brands within the energy and wellness drink category. These represent drinking preferences of the younger generation and the health-conscious. The company just needs to focus on execution of supplying consumers with what they want. Coca-Cola Amatil is seeing double-digit growth year-on-year and increasing volume share in these categories. The new Coca-Cola Life brand is just entering the market and could make a difference in 2015 as well.
— $100 million cost-cutting program: Earlier cuts by previous management reduced costs, but at the expense of improving the business further down the line. The current restructuring program will improve efficiencies and build in more growth capacity.
Weaknesses
— Long-term debt is still high. It is being paid down and the net debt position is manageable, but lowering long-term debt will reduce pressure on the company.
— Coca-Cola Amatil's Indonesia business suffers from rupiah weakness despite business improvement. 18.2% of the company's total revenue comes from the Indonesia and PNG segment. This can weigh down total group performance. The Coca-Cola Company, which owns 29% of Coca-Cola Amatil, has agreed to invest US$500 million for a 29.4% stake in the Indonesian business. Investors can look forward to better results as this investment is put to work.
