3 reasons I’m avoiding shares of Coca-Cola Amatil Ltd

Credit: Bill Dan

There are reasons to like Coca-Cola Amatil Ltd (ASX: CCL).

I used to own shares in the business and there is still hope for investors that management will turn the business around, potentially generating some decent capital gains and dividends for investors in the process.

Indeed, the shares rallied more than 4% just yesterday when Morgan Stanley upgraded its guidance on the shares from equal-weight to overweight. With the shares still languishing near a 52-week low, others will also be hopeful of a turnaround from here.

However, I sold my shares in the beverage manufacturer some time ago – partially because I felt there were better opportunities elsewhere for me to invest my money, and partially because I had begun to lose hope in the business’s prospects.

Here are three reasons why, in my opinion, investors may want to think twice before buying shares in Coca-Cola Amatil today…

Slow Progress

In 2014, it promised a return to mid-single digit growth in earnings per share over the next few years. Although it has made progress, it has certainly been slow.

Improving its Indonesian operations has been a particularly taxing process. Indeed, even though the company expects an improvement in volumes in 2016, it still expects currency headwinds to impact its results.

Brand strength

Products with the famous Coca-Cola logo have historically been able to charge a premium over less well-known brands, but that trend seems to have diminished somewhat.

Indeed, volumes and sales have struggled in Australia and New Zealand in recent years against the likes of Pepsi (whose products are typically cheaper a cheaper substitute for Coca-Cola products), which could well impact margins moving forward – as could pricing pressure from supermarket giants Woolworths Limited (ASX: WOW) and Coles.

The company has cut costs from its business, but cost reductions aren’t a sustainable way to continue improving earnings in the long run.

Health trends

Speaking of the long run, there are reasons to doubt the strength of Coca-Cola’s primary beverages as time goes on. That’s not to say I expect the brand to crash and burn, nor that I expect a superior product to be introduced anytime soon, but it seems many consumers are becoming more health-conscious and avoiding drinks containing high quantities of sugar.

To make matters worse, high-profile and well-respected chef Jamie Oliver is even campaigning for a sugar tax to be introduced to make fizzy drinks a more expensive habit. Higher taxes certainly haven’t killed the cigarette industry, but the growing awareness over the sugar issue wouldn’t necessarily be good for the brand either.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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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