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Should you buy Coca-Cola Amatil Ltd at today’s share price?

Credit: GillyBerlin

The share price of beverage maker Coca-Cola Amatil Ltd (ASX: CCL) is currently trading at $9.46 which means the stock has provided shareholders with a return of 1.4% over the 2015 calendar year to date.

That might not sound like much but when you consider the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has actually lost over 3% of its value this year, the stock’s near term result is credible.

However, what is more pertinent is the medium term performance of Coca-Cola Amatil. Over the past five years the share price has actually declined by 20%, which represents significant underperformance compared with the index which has manged to eke out a 13% gain.

That level of underperformance may come as quite a shock to some investors who would have expected a blue-chip stock such as Coca-Cola Amatil to produce a positive return over a five-year time frame.

It’s an unfortunate situation for longer term investors to find themselves in but the important decision to make now is to assess what the future holds for the beverage maker.

Here’s what we know:

  • In the half year to June 30, the Australian beverage business delivered an increase in both volume and trading revenue via investment in pricing, brand building, innovation and route to market improvements
  • Alcohol and Coffee earnings increased by 30.4% driven by improved market share across the Beam portfolio and the launch of new products
  • The board maintained an interim dividend at 20 cents per share, with 75% franking

Here’s what to expect:

  • Management has reaffirmed that the group remains on track to deliver over $100 million in savings over three years which will be reinvested into funding / marketing and innovation initiatives
  • The group is also on track with its strategic review which is leading to a refresh of the group’s products including smaller packs and frozen categories
  • Management is targeting a “stabilisation of earnings in 2015” with consensus data provided by Morningstar showing 2015 full year earnings per share (EPS) of 50.9 cents per share (cps) and dividend totalling 43 cps compared with 49.2 cps and 42 cps respectively in the prior 2014 year.

Buy, Hold or Sell?

EPS are expected to grow to over 58 cps in 2017 which implies annualised growth of around 7%. With Coca-Cola Amatil’s trading on a forward price-to-earnings ratio of 18.5 times, the stock looks around fair value and arguably is best categorised as a hold.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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