Foolish readers, gather around for today's lesson:
Negative press functions like compound interest, but in reverse.
You will have heard compound interest described as 'the eighth wonder of the world', a 'miracle', and 'man's greatest invention'. The same is true for negative press. Although it's not man's greatest invention, it does have a wondrous ability to destroy share prices. It can be hard for the company in question too, when they suddenly find that 1 bad news + 1 bad news = 4 bad news for their share price.
Both Coca Cola Amatil Ltd (ASX: CCL) and McAleese Limited (ASX: MCS) have been on the receiving end of this equation recently, with this article marking their second entry into the 52-week lows in the past month.
Coca Cola Amatil – last trading at $9.32
Brand power is proving of little value to one of the world's most recognisable names, with challenging conditions in the retail beverage business dragging down earnings. Earnings look likely to be some 15% lower compared to the previous year, twice as bad as the earnings decline flagged in the November trading update. The price has spiked upwards some 32 cents since hitting its 52-week low on Monday, but is still very close to a five-year low.
Management has flagged a 'strategic review' of the business, with more details on this to come at the May AGM. It almost sounds as though Coca Cola has become complacent in its role as market leader, with Managing Director Alison Watkins stating that: "We do however need to challenge our model thoroughly in light of the low growth and competitive markets in which we operate in order to deliver long-term sustainable growth". The good news is that Coca-Cola has the experience necessary to turn it around, and now that the board is fully aware of the challenges facing the company they should be able to stop the rot.
McAleese Limited – last trading at $0.435
It has been a very long six months if you've been a holder in McAleese Limited since its IPO in December. You will be very aware that a terrible truck crash triggered a business restructure, while lost contracts soured the outlook for what appeared a reasonable investment. You will also be very disappointed in the companies who rated McAleese a buy, back when the share price was $1.50.
Thankfully it looks like the worst of the bad news is over, with subsidiary Coote's transport continuing to operate in NSW and McAleese announcing a new acquisition of Western Australia Freight Group. Costing $15.4 million and valued at an EBITDA of 2.5-3x based on current revenues, it's a cheap acquisition and just what the doctor ordered for replacing contracts lost earlier this year.
Foolish takeaway
Long-term shareholders in both companies will be pretty sour over the erosion of their investment value in the past year, but it looks like the pain might be just about over. At a five-year low and with the fruits of a restructure yet to grow, it could be the perfect time to buy Coca-Cola – I am considering a purchase myself. As for McAleese, it is too early to tell how the company will fare, although it looks like it might have outrun its current streak of bad news. In the absence of any further negative announcements, I think that both companies have gone roughly as low as they will go.
