I think the Coca-Cola Amatil Ltd (ASX: CCL) share price needs a change in investor sentiment to boost its chances of beating the market.
How to make money in the sharemarket
In the sharemarket, you can make money by receiving dividends or when the price of your investment increases.
It's just like a property investment. You can make money by the rental income and/or the price of the property increasing.
One sharemarket strategy is to buy shares with low price-earnings ratios or P/Es. A P/E is simply the share price divided by earnings, also called profits.
For example, Coca-Cola Amatil's current share price is $9.30 and analysts are forecasting earnings per share (read: profits per share) of 55 cents. So it has a P/E of roughly 17 times.
In other words, today's price is equivalent to paying 17 times its expected profit. Some investors might take this figure, 17x, and compare to other similar businesses to get a sense of the 'value' of the shares.
It would be similar to valuing a house based on the rental income of similar properties. Just like a company's profits, you not may receive all the rental income (profit) because you may have expenses like maintenance or interest.
What's wrong with that?
Previously, Coca-Cola Amatil's goal was to return to mid-to-single digit earnings per share growth. That was after its share price went from over $15 in 2013 to below $9 in 2014. Unfortunately, things have not gone as smoothly as management would have liked. Indonesia is proving to be a tough market to crack, more consumers are avoiding fizzy drinks and the supermarket war between Woolworths Limited (ASX: WOW) and Coles, owned by Wesfarmers Ltd (ASX: WES), isn't helping the company's profit margins.
Bottom line, the company's profits per share probably won't grow as fast as many (all?) shareholders would like.
According to Morningstar, analysts are forecasting a 4.7% increase in earnings per share between 2017 and 2018.
But here's the problem with this scenario. If the company cannot deliver on its promise of mid-single digit profits per share growth, you need the sentiment to change in order to make money from your investment.
For example, if you pay a price of 17 times Coca-Cola Amatil's 2017 profits per share and the profits per share do not increase – you need someone else to pay more than 17 times its profits to make money.
It would be akin to buying a rental property at a price of 20 times its rental income but the rent does increase for two years. The only way you will make money is if the next investor thinks the income will increase.
The same thing could be said of all types of investing. However, it's a lot easier to make money if the company's profits are growing.
Essentially, what you are betting on is the sentiment changing.
So you either expect Coca-Cola Amatil to grow its profits, maybe by cracking into Indonesia or pushing back against Coles and Woolies, or the sentiment. And if the profits don't grow, you're left with the sentiment.
In my opinion, the sentiment around fizzy drink investments is unlikely to change anytime soon. And I'm sceptical of the company's ability to push back against the supermarket heavyweights or really succeed in Indonesia anytime soon.
Therefore, until the valuation of Coca-Cola Amatil shares improves materially, I'm not buying in.
Instead, I'll be targeting businesses that are growing their profits and paying dividends.
