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Foster's seem to think CCL is a trading sell...

11-Nov-2013
Morning Report

Coca-Cola Amatil (CCL, $11.99, Mkt Cap $9,160M). Trading Sell. The bubble still degasses.

Today’s Top Pick.

•CCL’s recent AGM resulted in the company downgrading its guidance, expecting a 5%-7% EBIT decline for FY13 vs previous flat to -4%. A confluence of factors continues to impact trading activity, despite a favourable warmer than average weather backdrop.

•Like many other companies, CCL has not seen an uplift in consumer spending post the Federal election. Aggressive pricing and market share ambitions by its major competitor Asahi (owner and distributor of Schweppes and Pepsi) is impacting top-line growth, while Coles’ and Woolworths’ continued push in private labels creates another competitive front. Additionally, the supermarket chains are reducing warehousing inventory.

•Offshore markets disappoint. High inflation in Indonesia has seen growth expectations revised, while the downturn in mining activity has contributed to a decline in PNG. Strangely, CCL’s optimism tends to be around its alcohol portfolio, bolstering its offering with the recent distribution deal of Samuel Adams. However this remains a marginal play for CCL. The significantly different customer segment means that CCL will require heavy investment to be serious in the alcohol sector. This is fraught with risk.

•The elephant in the room is the health-driven consumer awareness which is manifesting in bottled water taking market share from soft drinks. While CCL does have exposure to bottled water, it is a net loser in this scenario given that most of its earnings are derived from cola and other carbonated drinks. It is a portent of CCL morphing into a value trap. Except that there is a problem - its PE does not even appear to reflect value to begin with.

•CCL is trading at 17x consensus FY14 earnings, about a 10% premium to other industrials. But its struggle in the current environment, lack of strong growth, and uncertain strategy makes it difficult to warrant this premium. There exist more attractive defensive stocks, and the rotation into cyclicals will only make CCL less appealing.

•We rate CCL a Trading Sell.
http://www.fostock.com.au/announcements/coca-cola-amatil-ccl-asx