Coca-Cola Amatil Ltd (ASX: CCL) is an extremely strong business and has an incredibly strong and well known beverage franchise, with some of the most well-known brands in the world. The company also has a newly developed, thriving alcohol and coffee business which has increased its earnings by 30 percent each year for the last couple of years. Coca Cola is continuously pursuing new avenues of growth and now has a larger portfolio than ever.
The company also has practically unrivalled infrastructure and market access giving it a very durable competitive advantage. Free cash flow has risen to nearly $500 million dollars while the company has reduced its debt load and achieved a nearly 20 percent return on capital employed. There has also been significant investment overseas, as the company aims to capture market share in countries such as Indonesia. Coca Cola management has been extremely transparent with shareholders and the company targets a mid-single digit growth level while returning significant amounts of this capital to shareholders.
Coca Cola has clearly pursued a strategy of diversification as its core soft drink business has softened. The company now sells a wider range of beverages than it has ever sold, including water, energy drinks, juices, sports beverages and yogurts. The company has pursued this strategy both to cater to an increasingly wide range of consumer tastes, in addition to trying to offset the declines it faces in its core soft drink market, as the demand for these beverages has decreased significantly, as a result of consumers becoming more health conscious. The company strives to monitor the performance of its portfolio continuously and provide consumers with the beverages that suit their tastes.
Market conditions however, remain challenging for the company and while Coca Cola is trying to shift to rebalance its portfolio toward healthier, demand for their core products still remains soft. As their core beverages comprise such a large part of the company's sales, the bottom line is most likely to remain flat for the next couple of years, while dividends will probably only increase slightly. Coca Cola's valuation is currently fair, and it seems that there would be no reason to suspect significant variation from the predictions which have been provided by management.
Coca Cola has a solid balance sheet, with a manageable amount of debt and significant amounts of cash and receivables to offset their borrowings. The company has taken a conservative approach to managing its currency exposure and has purchased derivatives to manage its risk. This adds further predictability to its earning power; if somewhat limiting the potential for upside should the Australian dollar weaken.
Foolish takeaway:
Coca Cola Amatil is clearly a great company. On the basis of valuation however, I would recommend only holding shares or looking for more attractive investments.
