I like Coca-Cola Amatil Ltd (ASX: CCL) as a business. I also think it is undervalued, and reckon it's worth somewhere between $11 and $12 per share. However, as I state in the linked article, I sold my shares some months ago and I'm not in a hurry to buy them back.
More than previously, I think prospective buyers need to demand an even larger margin of safety from Amatil shares in order to make money on them. Although the company's cost-cutting program has delivered fruits, profit growth in recent times came predominantly from the $500 million equity injection from parent The Coca-Cola Company, which grew profits by reducing Amatil's interest payments.
Growth in Indonesia has been pleasing, even though the $500 million from Mum + Dad has not yet been used for its intended purpose of expanding Amatil's footprint in the country. Yet it's a different situation in the core Australian business, and from what I've seen both in the supermarkets and at the corporate level (in terms of company announcements), things appear unlikely to get easier in the medium term.
There's also the possibility of changes in the way people drink and what they like to drink. I think legislation against high sugar levels is a non-starter. Virtually every drink in Australia contains approximately 1/10th of its volume as sugar (eg 365ml = 36g sugar, a can of Coke contains 40g) so blanket legislation would affect all of them. Consumers favouring perceived healthier alternatives such as iced teas and juices cannot be ruled out as a problem, however.
Amatil has been proactive about starting its own brands in various segments such as iced coffee, vitamin water, fruit juices, and so on. It also has distribution for Monster energy drinks and a fairly broad portfolio of alcoholic beverages. Yet many of Amatil's new brands lack the name recognition of Coke or even of some of its non-soft drink competitors. The possibility of losing market share as consumers migrate to new beverages must be considered. Indeed, Amatil has seen anaemic soft drink volume growth, but has grown other categories such as coffee and water quite well, suggesting such a migration is already underway.
On top of that, there are balance sheet concerns. Amatil's cash flow is highly reliable and should remain so, but the company is burdened by debt and maintains a high dividend payout ratio, seemingly with no real intention of reducing its indebtedness.
For these reasons, I continue to avoid Amatil shares at today's prices. The company does have potential as an income stock, but even dividend-seekers should aim to buy shares at a lower price in order to achieve a better margin of safety.
