Why I’m avoiding Coca-Cola Amatil Ltd (ASX:CCL) shares

Behind water, Coca-Cola is the world’s most famous drink. Introduced in 1886 by Dr. John S. Pemberton and initially sold via fountains, Coca-Cola is now consumed approximately 2 billion times per day. 

Coca-Cola is Warren Buffett’s favourite drink and also one of the many success stories that has contributed to the incredible returns of Berkshire Hathaway Inc. (NYSE:BRK-A).

However, The Coca-Cola Co. (NYSE:KO) is not the same company as Coca-Cola Amatil Ltd (ASX: CCL). 

Whilst The Coca-Cola Co. owns a significant stake in Coca-Cola Amatil, they are separate companies with varying performances.

Since June 2008, The Coca-Cola Co share price has increased by approximately 60%. In the same time period, Coca-Cola Amatil has increased by 31%.  

Despite the product having the same competitive advantage that prompted Buffett’s investment, shareholder returns have been completely different. But does this mean that Coca-Cola Amatil has room to move? 

Coca-Cola Amatil is primarily involved in the manufacturing, distribution and marketing of beverages. Currently, Coca-Cola Amatil has a market cap of $6.52 billion and a P/E ratio of 17. 

In recent times, Coca-Cola Amatil has failed to grow earnings with sales, revenue and net profits all stagnant. From 2013, earnings per share fell from $0.66 to $0.32 in 2016 before a recovery to $0.52 as at 30 June 2017. 

Since 2008, Coca-Cola Amatil has earnt $5.77 per share and has paid out $4.80 per share as a dividend. With retained earnings of $0.97 per share, Coca-Cola Amatil has grown book value per share by only $0.27. 

The combination of poor earnings results and inefficient profit allocation partially affirms the underperformance of its American counterpart. Additionally, with a debt to equity ratio of 1.25:1, Coca-Cola Amatil does not present any overt value to me. 

Attention must also be paid to the growing anti-sugar movement and a looming sugar tax that could eat into profits. 

Foolish takeaway 

Whilst the brand of Coca-Cola is an example of a marketing masterclass, Coca-Cola Amatil is not the same company that Warren Buffett invested in across the Pacific Ocean. As such, I’ll stick to water for now. 

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Motley Fool contributor Matt Breen has no position in any of the stocks mentioned. 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.

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