Are Coca-Cola Amatil Ltd (ASX: CCL) shares a bargain yet? Their share price is down 14% this year, and down 38% over the past 5 years:
While Amatil is seeing improvement in its coffee, alcohol, and international (Indonesia, PNG) beverage businesses, the company's core Australian soft drink business continues to struggle. Given that the soft drink business accounts for the majority of revenue and profits, a small decline here can more than offset strong growth in the other businesses.
Additionally, Amatil is weighed down by a considerable degree of debt which the company seemingly has no intention of reducing. In fact, debt ballooned last year in order to fund a share buyback. While this should have marginally improved earnings per share, the cost of paying the additional debt (that funded the buyback) makes it look as though Amatil will basically just break even on the deal.
We've also written previously, here and here, of changes to Coca-Cola's brand strength and ability to command premium prices. You only have to look at supermarket shelves to see that Coke is being outcompeted by Pepsi on price, and it's being outcompeted at the same time as saddling itself with greater debt.
If you took the view that Coca-Cola may have to cut prices to compete with Pepsi, its shares look quite expensive today. Even without price cuts, the company's core business will likely continue being eroded away. In fact, I think what we have here is another Telstra Corporation Ltd (ASX: TLS) – a legacy company that is only being propped up by its dividend. If Coke cut its dividend, and this is something that I wished they would do when I was a shareholder (to pay down debt), I think the share price would collapse.
That's not to say that Coke's debt is unmanageable or its dividend is at risk – it's not. However, to me, the continued adding of debt suggests that Coke is unwilling to take uncomfortable measures that may strengthen the company for the long term. This may come back to bite if pricing and other competitive pressures persist.
