The Motley Fool

Coca-Cola Amatil Ltd (ASX:CCL) shares slump on broker downgrade

The fizz might be coming out of the share price of Coca-Cola Amatil Ltd (ASX: CCL) after its recent rally as the stock tumbled today following a broker downgrade.

The stock lost 2.5% to $8.92 in afternoon trade – making it one of the worst performers on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) although the fall is nothing when compared to Telstra Corporation Ltd (ASX: TLS) and Greencross Limited (ASX: GXL), which shed between 4.5% and 5.5%.

At least shareholders in Coca-Cola Amatil are still ahead by 5.3% since the start of calendar year 2018 when the top 200 index is only 1.5% in the black.

But this could be the time to take some profit off the table while you’re still ahead, according to Ord Minnett.

The broker downgraded its recommendation to “lighten” from “hold” as it can’t see any fundamental support for the stock’s valuation, particularly when the company has much lower growth prospects versus other Coke bottlers around the world.

Further, Ord Minnett also notes that Coca-Cola Amatil’s Indonesian operations aren’t improving and the broker warns investors not to underestimate the risks involved in turning around the company’s local operations.

“[The] recent share price performance has removed valuation support, especially given its much lower growth versus its global peers. The stock is now trading well above our discounted cash flow valuation of $7.84 and its P/E [price-earnings] multiple has expanded given earnings declines,” said the broker.

“The Indonesian market is subdued and is expected to weigh on near-term earnings. The environment for the consumer in Indonesia has deteriorated a little in 2018 while the backdrop for fast-moving consumer goods (FMCG) in Indonesia remains difficult.”

As for Coca-Cola Amatil’s local operations, Ord Minnett sees two potential trouble spots. The first is the capital investment needed to drive revenue growth as consumers move away from sugary drinks and as supermarkets push private labelled beverages.

The broker believes this is no easy task and management’s past track record doesn’t give Ord Minnett much confidence of a successful outcome.

The second headwind is the container deposit scheme (CDS) which has been adopted in New South Wales.

“The slower uptake to the scheme may provide a boost to revenue per case, yet we suggest this will not support earnings in the long term while amplifying the negative volume impact,” warned Ord Minnett.

Assuming Ord Minnett is on the money, Coca-Cola Amatil could quickly move from hero to Coke Zero.

If you are wondering which blue-chip stocks will make a better buy in this market, the experts at the Motley Fool may have just the answer for you.

They have picked three of their best blue-chips for 2018 and you can find out what these stocks are by clicking the free link below.

5 stocks under $5

We hear it over and over from investors, "I wish I had bought Altium or Afterpay when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" And it's true.

And while Altium and Afterpay have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $5 a share!

*Extreme Opportunities returns as of June 5th 2020

Motley Fool contributor Brendon Lau owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Greencross Limited and Telstra Limited. The Motley Fool Australia has recommended Coca-Cola Amatil 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 Scott Phillips.

Related Articles...