Is Coca-Cola Amatil Limited a buy at this share price?

Credit: Bill Dan

Coca-Cola Amatil Limited (ASX: CCL) shareholders haven’t had a pleasant experience over the past few years with both profits and the share price suffering a significant decline since 2012.

The decline in profitability can be partially explained by a change in consumer tastes which has seen a shift towards healthier beverage options.

The decline can also be partially explained by major customers such as Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES). These two supermarket giants have argued for better terms from Coca-Cola Amatil (CCA) which has led to a shrinking in CCA’s profit margin and a shift in pricing of key products such as Coke and Mt Franklin water towards lower everyday prices.

Here’s a look back at CCA’s results over the past few years (note: CCA operates on a calendar year basis):

In 2012 revenues and earnings both hit record highs of $5.1 billion and $558 million respectively. The release of these results in early 2013 corresponded with the share price hitting an all-time high over $15.

In 2013 CCA reported a drop in revenue to around $5 billion and a fall in profit to $503 million. These results obviously displeased the market with the share price subsequently falling to under $10.

2014 turned out to be an even worse performance for the group. While revenues stayed roughly steady at $5 billion, profits sunk to just $375 million – a level not seen since around 2006.

Thankfully, 2014 appears to have represented the low point for earnings with CCL reporting a rebound in revenues to $5.1 billion and a higher profit result of $393 million in 2015 (source: CommSec; profits are before abnormals).

A brighter future?

With the company recently reporting interim profit growth of 7.8% to $198 million and a 5% increase in the interim dividend to 21 cents per share (cps) for the six months to June 2016, there is reason to believe that shareholders can expect a brighter future.

Management provided guidance that it is targeting a “return to sustainable mid single-digit EPS growth levels” which would certainly be a pleasing growth rate for this large company.

Attractively priced?

The improved earnings picture and more positive outlook has led to CCA’s share price recently rallying to a 52-week high of $9.99. Currently the shares are trading at $9.85 with one analyst consensus estimate forecasting earnings per share for 2016 of 54 cps (source: Reuters).

This forecast implies a price-to-earnings ratio of 18.2 times. Management has provided guidance for a medium term dividend pay-out ratio of over 80%. Assuming an 80% pay-out ratio of the 2016 forecast would imply a dividend yield of 4.4%, partially franked.

These metrics, in my opinion, are relatively attractive considering the strong brand and potential turnaround in the group’s fortunes.

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Motley Fool contributor Tim McArthur 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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