Following on from my top stock pick for February, this month my favourite stock idea for new money is Coca-Cola Amatil Ltd (ASX: CCL).
It's Australia's (and five neighbouring countries) exclusive distributor of Cola-Cola branded products and has the right to Beam branded alcoholic products, until December 2023.
However, before getting stuck into details of Coca-Cola Amatil, here's how my last four monthly stock picks have trended so far…
| Company Name & Stock Code | Price then | Price now | Difference |
| NetComm Wireless Limited (ASX: NTC) | $0.46 | $0.46 | -1.09% |
| Credit Corp Group Limited (ASX: CCP) | $10.44 | $10.92 | 4.60% |
| G8 Education Ltd (ASX: GEM) | $3.85 | $3.74 | -2.86% |
| Slater & Gordon Limited (ASX: SGH) | $6.28 | $7.25 | 15.45% |
| Coca-Cola Amatil Ltd (ASX: CCL) | $10.68 | ||
| Average gain: | 4.02% | ||
| S&P/ASX200 (ASX: XJO) (Index: ^AXJO) | 5331.4 | 5825.7 | 9.27% |
Note: Dividends are not included since reference to the All Ords Accumulation Index is not readily available.
Why buy Coca-Cola Amatil?
Coca-Cola Amatil, or CCA, has one of the world's most widely recognised brands at its disposal. Whilst it may not be obvious from the company's complaints over pricing pressures from supermarket giants Coles and Woolworths, this brand power affords it a durable competitive advantage.
There is demand for Coca-Cola due its quality and unique taste. Of course, there are cheaper alternatives, but it's not the same thing.
Here's why now is the time to buy…
Coca-Cola Amatil's share price over five years. Source: Google Finance.
Whilst competitive advantages must be maintained by constant reinvestment, CCA has, arguably, neglected its brands in recent years.
It may just be me but after it launched its highly successful Share a Coke Campaign in the summer of 2011/2012, until late 2014, I saw very few Coca-Cola advertisements on television, or elsewhere.
Further burdens on CCA's profits – and ultimately its share price – were the stubbornly high Australian dollar, slow growth in Indonesia and competitive pressures within its tinned fruit business, SPC Ardmona – which it acquired in 2005.
In recent times SPC Ardmona has suffered through huge write-downs and was forced to put jobs on the cutting block to lower costs.
Obviously, the high dollar was out of the company's control. But it adversely affected CCA's competitiveness against cheaper foreign products, which could be imported at a low cost, with their foreign owners having the added incentive of possibly benefitting from the repatriation of profits in a stronger currency.
However, with the Australian dollar falling more than 15% against the greenback in the past year alone, recent foreign exchange rate movements bode well for SPC Ardmona moving forward.
In Indonesia – CCA's flagship growth market – growth has been disrupted by intense competition and a plummeting rupiah.
Indonesian rupiah to Australian Dollar. Source: Google Finance.
However the recent announcement of a $US500 million cash injection from major shareholder and parent, The Coca-Cola Company, in exchange for a 30% stake in the Indonesian business could revive the company's key growth market.
Valuation, Valuation, Valuation
I remain sceptical of the group's success in Indonesia and do not believe it'll be able to widen its EBIT margin to anywhere near as high as that of the Australian division's 16.6%, in the coming years. Moreover, I don't see the SPC Ardmona business as a significant contributor to the group's bottom line in the future.
In fact, I think the reason CCA shares are a worthwhile investment today is down to their modest valuation.
Indeed, if the company can return to single digit earnings growth, keep debt at a reasonable level and capital expenditure around $320 million, today's market price justifies an investment, in my opinion.
I estimate fair value for CCA shares to be above today's market price of $10.68 using both low-single digit EBIT growth and more bullish high-single digit EBIT growth, combined with lower than current profit margins, over the next five years.
So long as CEO Alison Watkins can deliver on her promise of low-single digit earnings growth (which is significantly lower than the company's growth rate over the past decade), the current valuation of CCA shares does not appear demanding.
Whilst it's also important to keep an eye on debt, CCA enjoys good profitability across most of its operations, which enables it to have a strong interest cover of 5.2 times.
Foolish takeaway
Obviously, there are risks to my valuation of CCA shares. However, aside from a major economic setback (which shouldn't be ruled out), it appears to be a sound investment for long-term capital gains. Its 3.95% partially franked dividend will also keep shareholders enthusiastic, while we wait for a turnaround.
