Coca-Cola Amatil Ltd (ASX: CCL) truly tested the market's patience between 2013 and 2014, over which time volumes, sales and overall earnings took a significant beating. But after having plunged nearly 47% in value, the stock has been on a tear more recently, climbing 33% since bottoming out at $8.19 in October to be trading at $10.87 today.
Australia's largest non-alcoholic beverage manufacturer's earnings came under substantial pressure as a result of structural changes in the marketplace. Indeed, the company's old management faced scrutiny for their inability to respond to changing consumer trends (away from sugary soft drinks), whilst also under-investing in new products.
Meanwhile, sales took a beating locally due to a pricing war with Schweppes and pressures from supermarket giants Woolworths Limited (ASX: WOW) and Coles, owned by Wesfarmers Ltd (ASX: WES). Its Indonesian division also struggled due to competition and issues related to wage inflation.
However, as the company confirmed in its 2014 Annual Report, released to the market yesterday, it believes there will be no further declines in earnings while it is targeting a return to mid-single digit growth in earnings per share over the next few years. Although conditions remained tough through 2014, momentum began to pick up towards the end of the year which is a good indication of stronger results in 2015.
In saying that, its success in Australia and Indonesia will play an instrumental role in how the group as a whole performs, so that is something that investors need to remain wary of.
The Outlook
In a strategic review that was undertaken to turn the sinking ship around, Coca-Cola Amatil's management team identified ways to improve earnings. While it has highlighted $100 million in annual cost reductions, it will also focus more heavily on marketing and product development to strengthen its position in the local market.
One of these initiatives is the recent release of Coke Life – a naturally sweetened beverage with one-third less calories and sugar than standard Coke – which was its first major new product for the brand since that of Coke Zero in 2006. While there is no guarantee that Coke Life will be as successful as Coke Zero, it could certainly provide a boost in overall group sales and help to reinvigorate the brand name.
On a final note, Coca-Cola Amatil also sold 29.4% of its Indonesian business to its parent entity, The Coca-Cola Company for US$500 million. This money will be invested in the region over the next few years to fund expansion of production, warehousing and cold drink infrastructure. Although this move will dilute any earnings attributable to Australian shareholders, it could also help the business fulfil its growth potential which is important to the company's overall success.
Should you buy Coca-Cola Amatil?
Although the issues facing the business will have no overnight fix, it appears that its management team is making all the right decisions to grow the business. At its current price of $10.87, the stock could add plenty of fizz to a long-term investor's portfolio, while its delicious 3.9% dividend yield (franked to 75%) is enough to get your returns bubbling.
