Coca-Cola Amatil Ltd dips below $10: Should you buy?

Here's why shares in Coca-Cola Amatil Ltd (ASX:CCL) look like an appealing long-term purchase at today's prices.

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After a period of relative price strength where shares traded as high as $11 each, a falling ASX has dragged Coca-Cola Amatil Ltd (ASX: CCL) back to today's price of $9.68.

While it is still technically at one of its highest points all year – far higher than lows of $8.50 back in October – the recent fall in price represents a good opportunity to stock up on Coca-Cola shares, and here's why.

The recent Annual General Meeting (AGM) two weeks ago provided clarity into the company's strategy for 2015-2017, removing a lot of uncertainty and thus risk. Here's what was revealed:

  • No further decline in Earnings Per Share (EPS) after 2014
  • Targeting mid-single-digit EPS growth each year
  • Capital expenditure of $330 million per annum for next three years (mostly Indonesia, some Aus and NZ and a little bit into SPC Ardmona)
  • Based on its cash flow and capital expenditure, well placed to reach target dividend payout ratio of 'over 80%'
  • Maintain conservative debt levels
  • Potential to pursue capital management initiatives or acquisitions
  • Bolt-on acquisitions only

At today's prices, Amatil pays a dividend of 42 cents per share (4.3%), franked to 75%. In an earlier article I did a brief forecast of future dividends based off Coca-Cola's earnings growth; Amatil could be paying 48-49 cents per share in 2017, equivalent to a 5% yield at today's prices.

Coca-Cola currently trades on a Price to Earnings ratio (P/E) of 20. This is a little expensive for single digit earnings growth, but the defensiveness of its earnings and its strong cash flow and high dividend payout ratio would seem to justify it.

Over the long term there is substantially more profit potential to be unlocked; at current growth rates the Indonesian business could outstrip Australia in terms of volume by 2017. Unfortunately, the business has a long way to go to make a reasonable earnings contribution thanks to competition, a weakening Rupiah, wage inflation and more.

While the Indonesian businesses would seem to be a drag at present, with over 10x Australia's population the prospective market is far greater and investors must take a long-term view. The Rupiah won't stay weak forever, and while wage increases are costly they also increase discretionary income – empowering more consumers to afford Coca-Cola – which is vital when the minimum wage is ~AU$150 a month.

Finally a renewed focus on productivity and cost reduction is estimated to save the business $100m over the next three years; savings which are expected to be ploughed back into marketing. A strong marketing base provides a fertile environment for new product launches (think Coke Life, or Barista Bros), which is good news for the company's attempts to reach a wider range of customers.

Once it becomes clear to the market that Coca-Cola has turned its troubles around (expect the next interim or full-year report to be a catalyst) I can easily see shares rising 10-20% from today's modest prices.

I also find it hard to believe that Coca-Cola will go much lower, and with its long-term growth opportunities today looks like a rare opportunity to pick up a great company at a depressed price.

Motley Fool contributor Sean O'Neill owns shares of Coca-Cola Amatil Limited. The Motley Fool Australia has no position in any of the stocks mentioned. 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 Bruce Jackson.

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