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Why this broker rates Coca-Cola Amatil Ltd as a buy right now 

Coca-Cola Amatil Ltd (ASX: CCL) is a licensed bottler of Coca-Cola, operating across the Asia Pacific region.

What this basically means is that it has an exclusive contract with the US-based Coca-Cola Company to distribute its product. The American firm sells CCL Coke in the form of a concentrate, which the Australian company then finishes, bottles and sells on to local retailers.   

But Coca-Cola Amatil is more than just Coke – it is the largest premium branded beverage and food company in Australia, distributing a diversified portfolio of products including various bottled waters, cordials, alcoholic drinks and tinned fruit. 

Its share price has been on a downward trajectory for most of the last 12 months, dropping around 17% from $10.25 at the beginning of 2017 to be valued at $8.48 recently.

In late November the share price hit its lowest point in almost a decade, valued at just $7.63.   

The price plummeted after CCL announced that $40 million worth of spending originally intended for 2019 and 2020 was instead going to be brought forward into 2018, negatively impacting earnings.

What particularly alarmed analysts at the time was that CCL planned on cutting prices of its non-carbonated drinks in order to try and capture market share in areas outside of its core soft drinks business.  

This news compounded an already negative market sentiment that had originally been stirred up when the company announced that sales volumes of its fizzy soft drinks had fallen 3.8% in the half year to June 2017.   

CCL was in a precarious position. With more health-conscious consumers turning away from its sugary fizzy drinks products, it realised the need to expand the other branches of its business. But cutting margins to compete on price didn’t seem like an appealing strategy to most analysts. 

But recent performance has been a little more positive. Since that November low the share price has rebounded 11%. 

So what explains this turnaround in fortunes?  

It seems as though most of the increase in the share price could be due to more favourable profit guidance released to the market in late November. Group managing director Alison Watkins advised that profit for the 12 months to December was forecast to be $13 million higher than the prevailing consensus forecast of $405 million. 

This means that CCL will manage to reverse a 4% dip in net profit from the half year ended June 2017, when it posted a disappointing underlying net profit of $190.1 million.

A strong second half of 2017 could significantly lift short term optimism around CCL’s ability to generate earnings in a tough market.  

Morningstar analysts seem to agree. They believe CCL’s share price has been unfairly punished by the market, and have tipped it for a 9% increase.  

It also has a healthy 5.4% dividend yield, which puts it ahead of its peers in the consumer staples industry. Woolworths Group Ltd (ASX: WOW) has a lower dividend yield of 3.1%, as does Treasury Wine Estates Ltd (ASX: TWE), though both their shares have performed significantly better than CCL’s over the last 12 months, up 12% and 45% respectively. 

It currently trades at a bit over 34 times earnings, which isn’t unreasonably high relative to its peers.

Treasury Wine Estates trades at 43x and A2 Milk Company Ltd (ASX: A2M) trades at 62x.  However both Woolworths and Metcash Limited (ASX: MTS) trade a lower multiples of 23x and 16x times respectively, indicating they may be cheaper relative to Coca-Cola Amatil right now.  

Foolish takeaway

Personally, I’m not as bearish on Coca-Cola Amatil as Morningstar. Even if CCL hits its profit guidance, it’s still only flat against its 2016 results. That’s hardly a banner year. Consumer sentiment still seems to be increasingly shifting away from well-known sugary drink brands and towards healthier beverages. 

It’s precisely this view of the industry that motivated the Australian Foundation Investment Company to reduce its holding in Coca-Cola Amatil by about a third in October.

As incoming managing director Mark Freeman told the Australian Financial Review at the time, it doesn’t matter how good the product is, or how strong and far-reaching the company’s distribution network is:- “if the trend is away from the consumption of those products, it makes it hard.” 

It may be true that CCL’s shares are currently oversold in the market, and it could offer some short-term gains. But for an investor with a longer-term view Coca-Cola Amatil doesn’t seem to provide very attractive growth potential. 

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Motley Fool contributor Rhys Brock owns shares of Treasury Wine Estates Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Coca-Cola Amatil Limited and Treasury Wine Estates Limited. 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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