'Earnings season', as the current flurry of results and updates has come to be known, is always an ideal time to reality-check your investing thesis.
Most investors, when they buy a stock (I hope!), generally expect to see 'X', hope for 'Y' and would ideally like to avoid 'Z'. I have such a thesis for both the following stocks, who I felt had two of the most interesting reports of earnings season to date:
Coca-Cola Amatil Ltd (ASX: CCL)
Amatil's half-year report was always going to be hotly anticipated. Readers may have seen previous articles of mine in which I outlined the buy case for Amatil and what I thought would happen.
Broadly speaking, I felt that Australian volumes would rise anaemically and that Coca-Cola would have trouble maintaining a price premium over competitors' products – both of which came true, with volume rising 2.8% and revenue per unit case falling 2.2%.
Indonesian volume growth was smack-bang on the 7% increase I forecast, although I hoped for better results as my valuation depends on growth increasing by 1% per annum to hit 10% in 2018. Earnings were much better than I expected with revenue and margins improving sooner than forecast.
One drawback I saw was that alcohol and coffee earnings were somewhat illogically lumped in the same reporting segment, making it difficult to analyse the results in each business.
Neither are central to my investing thesis (I forecast stagnant alcohol revenues) but I would like to see individual results to better gauge management's efforts in this area.
If both areas start to perform there is extra upside on offer for shareholders, but Coca-Cola reported exactly as expected and I continue to hold my shares while the company evolves.
Carsales.Com Ltd (ASX: CAR)
I've had my eye on Carsales for quite a while but only recently got around to purchasing shares. One tenth of their value went up in smoke on reporting day, and I used the opportunity to increase my holding.
My thesis for Carsales is less defined than for Coca-Cola, but speaking generally I expect growth at its flagship website to continue slightly below its current pace, while leveraging the company's entrenched position in the market to offer parallel services.
When you're selling a car, among the first things you do are clean it, put new tyres on it and get it certified as roadworthy. When you're buying you might inspect it, do a REVS check (to see if any debt is still owing on it), and access finance to pay for it.
Carsales' acquisition of 50.1% of Stratton Finance (vehicle financier) and AutoInspect (vehicle inspection business) during 2015 was a great step in the right direction, while tyresales.com.au is another solid 'vertical' that fits with the above needs and could potentially add a lot of value to customers.
Over the longer term I hope to see the success of carsales.com.au replicated in Brazil and Korea, and the transition to a paid sales model in Korea was a step in the right direction.
One area I do have a question mark around is the pricing of carsales.com ads. While it's not expensive, it's difficult to evaluate at which point price becomes an issue for sellers and how much room there might (or might not) be for pricing increases. The lower-priced end of the car market would appear to be more sensitive to cost and Carsales might have to consider multi-tier, percentage-based or other pricing strategies over time.
Generally speaking however, Carsales.Com and Coca-Cola Amatil ticked all the boxes with their latest results and it looks as though both companies have a long-term future ahead of them. I bought my shares at higher prices, and both companies look like a bargain today.
