The fizz might be coming out of the share price of Coca-Cola Amatil Ltd (ASX: CCL) after its recent rally as the stock tumbled today following a broker downgrade.
The stock lost 2.5% to $8.92 in afternoon trade – making it one of the worst performers on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) although the fall is nothing when compared to Telstra Corporation Ltd (ASX: TLS) and Greencross Limited (ASX: GXL), which shed between 4.5% and 5.5%.
At least shareholders in Coca-Cola Amatil are still ahead by 5.3% since the start of calendar year 2018 when the top 200 index is only 1.5% in the black.
But this could be the time to take some profit off the table while you're still ahead, according to Ord Minnett.
The broker downgraded its recommendation to "lighten" from "hold" as it can't see any fundamental support for the stock's valuation, particularly when the company has much lower growth prospects versus other Coke bottlers around the world.
Further, Ord Minnett also notes that Coca-Cola Amatil's Indonesian operations aren't improving and the broker warns investors not to underestimate the risks involved in turning around the company's local operations.
"[The] recent share price performance has removed valuation support, especially given its much lower growth versus its global peers. The stock is now trading well above our discounted cash flow valuation of $7.84 and its P/E [price-earnings] multiple has expanded given earnings declines," said the broker.
"The Indonesian market is subdued and is expected to weigh on near-term earnings. The environment for the consumer in Indonesia has deteriorated a little in 2018 while the backdrop for fast-moving consumer goods (FMCG) in Indonesia remains difficult."
As for Coca-Cola Amatil's local operations, Ord Minnett sees two potential trouble spots. The first is the capital investment needed to drive revenue growth as consumers move away from sugary drinks and as supermarkets push private labelled beverages.
The broker believes this is no easy task and management's past track record doesn't give Ord Minnett much confidence of a successful outcome.
The second headwind is the container deposit scheme (CDS) which has been adopted in New South Wales.
"The slower uptake to the scheme may provide a boost to revenue per case, yet we suggest this will not support earnings in the long term while amplifying the negative volume impact," warned Ord Minnett.
Assuming Ord Minnett is on the money, Coca-Cola Amatil could quickly move from hero to Coke Zero.
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