One big reason to sell your Coca-Cola Amatil Ltd shares today

I like Coca-Cola Amatil Ltd (ASX:CCL), but its moat is slowly being eroded away as the world changes.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Earlier this month, after a spate of poor earnings updates from big ASX listed blue-chip companies, I threw my hands in the air in frustration and moaned that 'Big dividend shares are Dead'.

But I'm not ready to give up! This week I've been digging into bottler and distributor Coca-Cola Amatil Ltd (ASX: CCL).

The company has delivered patchy earnings performance over the last five years, but it has a fantastic production and distribution network. The problem is I view the on-going decline in brand value as a big risk for investors.

Charting the decline of a brand

If there is a competitive 'moat' to be found in Coca-Cola Amatil, I would argue it is not the 'Coca-Cola' brand.

The 'Coca-Cola' brand is tumbling in the global recognition surveys like this one from WPP and Kantar Millward Brown. While the Coca-Cola ranking has been pushed down by the rise of big tech companies, in the last two years the brand has also suffered falls in the survey's estimate of brand value.

Source: Brandz.com

The reason for the decline runs deeper than just changing health trends – it is a reflection of the structural change in the traditional advertising industry on which the Coca-Cola brand was built.

T.V. advertising was once the mark of a superior product. Today, online advertising has opened the door to new agile competitors targeting segmented niche customers; slowly diluting Coca-Cola's dominance and ability to charge price premium.

The loss of supply to Domino's Pizza Enterprises Ltd. (ASX: DMP) could be seen as a symptom of the inability to command price premiums.

Businesses need competitive advantages to command above average returns on invested capital and protect these returns over the long term. Over the last five years Coca Cola Amatil's return on capital has declined from 24% to 19.6%, but has lifted marginally in the last two years.

I would be reluctant to assign any valuation premium to the Coca-Cola Amatil business on the basis of 'brand value' today.

Instead, one appealing aspect of Coca-Cola Amatil is its strong cash position. The company had just over $1 billion of cash at 30 June 2017 after throwing $250 million into a share buy-back and continues to produce strong cash flows.

However at the current share price of around $8 per share it's not enough for me to add Coca-Cola Amatil to my 'buy' list today.

Motley Fool contributor Regan Pearson has no position in any of the 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.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »