The Coca-Cola Amatil Ltd (ASX: CCL) share price could be undervalued according to one leading broker.
This morning analysts at Goldman Sachs reiterated their buy rating and increased their price target on the beverage company's shares to $10.60.
Including dividends, this price target implies a potential return of just over 10% over the next 12 months.
Why is Goldman Sachs positive on Coca-Cola Amatil?
Goldman notes that, unlike many other Australian Consumer Staples stocks, Coca-Cola Amatil has been negatively impacted by COVID-19 due to its exposure to the on-the-go channels.
While this is disappointing, the broker believes the market is under-appreciating how quickly the company can recover once the crisis passes.
It commented: "CCL appears to have been less resilient to the pandemic in comparison to the other staples due to its significant exposure to the On-the-go channel. However, the current discount of -2.4x on the distressed FY20 earnings (-18.2% vs. FY19) is unwarranted in our opinion, especially given our expectations for earnings recovery hereafter."
Goldman has been looking at other markets in which Coca-Cola operates and observes that volumes in countries which were more open as normal during the crisis, such as the United States, have fared well.
Whereas volumes in countries with significant mobility restrictions, such as Australia and New Zealand, have fallen.
The broker believes this data "suggests the return to normality should be more rapid for these regions once the mobility restrictions are removed."
In addition to this, the broker notes that Coca-Cola Amatil has made significant cost savings, some of which will be permanent. It believes this could be a big boost to its earnings in the near term.
Goldman explained: "Overall, this implies that if CCL was to deliver on the A$120mn of permanent cost outs, our earnings offer significant upside risk."
"We plan review our forecasts as border openings progress in Australia and once we have more guidance on the strategy to achieve this cost savings. We expect these details to be discussed during the investor day in November," it added.
Should you invest?
While I would sooner buy Coles Group Ltd (ASX: COL) ahead of Coca-Cola Amatil for exposure to consumer staples, I think Goldman Sachs makes some great points.
Though, it might be worth waiting until its investor day event next month before making a move.
