Coca-Cola Amatil Limited (ASX: CCL)

By Jason Fittler

CCL manufactures and distributes carbonated soft drinks, water, sports and energy drinks, fruit juice, flavored milk, coffee and ready-to-eat fruit and vegetable products.

The attraction of this business is its defensive earnings profile; the result of a stable of well recognised brand names including Coca-Cola, Sprite, Fanta, Lift, Deep Spring, Mother, Kirks, Jim beam, Canadian Club, Maker’s Mark, Galliano, Mount Franklin, Powerade, SPC, Ardmona and Goulburn Valley.

An excellent distribution network as well as its dominant position in the carbonated soft drinks market in Australia has enabled the company to post respectable returns on capital.

Looking forward, the bulls argue that earnings growth will be underpinned by Indonesia, the world’s fourth most populous country. With a growing middle class of millions and low levels of soft drink penetration, the company is seeking to increase its footprint through ongoing investment in marketing and infrastructure.

The bears counter that management have a mixed track record on overseas expansion. They also argue that Indonesia is a high-risk low-margin market where incumbent retailers such as Asahi and Suntory will compete in an aggressive manner.

In terms of key measures, profitability is good with return on equity averaging 27.3% for the past two years.

Gearing is high at 77.6% but a robust interest cover of 8-times placates our concerns.

On our numbers for 2014, CCL is trading on prospective 16-times earnings and paying a gross yield of 7.1%.

We feel that these numbers are undemanding for a defensive company with a track record of above-average earnings and dividend growth.

The stock is suitable for risk tolerant investors seeking a combination of growth and income. 

For more information on Coca-Cola Amatil Limited (ASX: CCL) please contact us on 07 4771 4577.