CCL - Coca-Cola Amatil

[ROE]

So much for Warren Buffet's advice to choose stocks that you wouldn't mind holding if the market closed for 10 years...

A man with reasonable intelligent wouldn't follow someone advice blindly, a lot of his advice are general principles rather this is what one must do.

What he mean by that statement is you buy business that are sound and attractive and can last a long time and you not worry or get freak out about day to day price movement.

How much you pay, whether it is over price, when you buy up, let go, is something you have to sort it out for yourself.

At a certain price and when I load up big on coke, I wont mind holding it for 10 years even if the market close

A lot of people love to have a go at him when stuff go wrong but seriously his general principles are very very good if you understand them and apply it properly.

when you buy stock even if Warren Buy them and it went wrong it is your fault no one else..why is it your fault?
1. because you stupid to follow someone else advice
2. you didnt do enough research
3. you over pay
4. you follow the hype
5. XXXX reasons end of the day you pull the trigger and buy so its your decision, take responsibility for it else throw the money into bank term deposit account.

by you I dont imply it is you personally, it can be me, you or anyone else.

 

[McLovin]

So much for Warren Buffet's advice to choose stocks that you wouldn't mind holding if the market closed for 10 years...

Actually, doesn't it make his point? If you paid a fair price and the company is sound then you don't need to worry about day to day price movements. The business will do the heavy lifting for you, not the share price and you don't need to worry over that ten year period that a company destroying event will occur. Of course if you overpay then it doesn't matter how great the business is, you will degrade your return. By way of example, Microsoft still hasn't returned to its peak price in the 2000 tech boom, in fact the SP would need to rise 50% to get back there. MSFT still fits in to what Buffet was talking about, that is a business you'd not be worried about owning with no way of exiting for ten years.

The reality is that these guys are still selling Coke. So the market ran ahead of itself (like I said upthread it is very similar to what happened to CCL in 1998-2000). Does that mean the company won't exist in ten years? Unlikely. And I'd say with a very high degree of confidence that in ten years time CCL will have higher revenue, higher profits and higher dividends.

A long term investment is two pronged questions:

1) Is this a business I want to own?

2) What price should I pay for it?

You can't ignore the price, because there is a price at which any business becomes an investment candidate, and similarly even the best businesses are not worth an stupidly high price.

 

[icemanmelb]

CCL like any other business has great assets and great people. Unfortunately like many established business, it's been sitting idle while it's competition has gone pass them. So it's time for a spring clean, write downs and profit warnings by the new CEO. Will Coke exist in another 10 years. Im pretty sure it will exist in 10 yrs time but what form will it be in? That's the million dollar question so I'll have to wait for more info.

Also regarding Buffett, I don't have deep pockets like him nor do I have the edge like him so I can't invest like him. With limited funds, I can only invest within my limited funds means. He also read 1000s of Quarterly and Annual reports every year. He also said he doesn't mind buying a great company at a fair price.

In the current CCL report, the analyst were expecting 71 cps but I worked out as approximately 50 cps. Hence the shocker on Friday. It's PE might need to be revised down as well. So let's see where Analyst such as Gino Rossi thinks fair value should be. Until then, some of the rides in Wet & Wild might more suitable for me.

Ice

 

[tinhat]

To buy or not to buy, that is the question. It depends on your objectives and your outlook. Management have performed poorly over the past few years looking at the fundamentals. Flat earnings (declining EPS in real terms) but the company has a solid balance sheet with a healthy return on assets and very good return on equity. The fact that they have constantly come to the market with bad news over the past couple of years highlights that strategically, they haven't been on the game and haven't been able to anticipate and address the challenges they have faced in the market.

I don't follow this stock so I don't know the answers to these questions to work out where the problems lie.

Is there a problem with the brand? Is the flagship Coke brand in decline? If fragmentation in the packaged beverage market is increasing, can the same volumes be sold with the same economies and margins as before? If the market is becoming fragmented (be geographic region and/or demographics) and fashion driven does the business retain a competitive advantage? To me this is the most fundamental question to ask about this business. The main asset that this business is leveraged off is the Coke brand.

Are there problems with the structure of distribution channels and are they shifting power away from the manufacturer?

I don't know what their strategy is for Indonesia, but looking at the bottom line performance of CCL over the past few years, they don't appear to be punching the lights out, yet one would expect this market to be the engine room of growth for packaged beverages. This is a mark against the management.

Another issue that I mark down management over is the SPC Admona business. This has been a dog of a business for years. CCL should have got out of thus business a few years ago when it had a chance, or alternatively, come up with a plan to completely restructure the business from the ground up. Management don't seem to have had the capability to identify and implement the sort of radical restructuring that the industry has needed.

I also question whether management have been tough enough and flexed enough market power when dealing with the big retailers. Remember when Fosters pulled VB from Coles and Woolworths a few years ago because the supermarkets were wanting to trash the VB brand through below-cost discounting? Is Coke letting the major retailers erode its brand and it margins?

In essence my assessment of management is that the value of their flagship brand and their market power within key distribution channels are waning in their primary market (Australia) and they are not performing in their growth market (Indonesia) to anywhere near what I had expected them to.

From a fundamental/medium-term income investing point of view, I don't know if a grossed up yield of only 7% in a company (albeit with a sound balance sheet) that has performed poorly and has a stable but poor outlook (flat earnings), in the context of my personal assessment of management's performance, warrants my investment at the current price. I don't think at the current price the market has overshot to the downside.

Would I be happy to buy CCL at the current price and walk away for ten years? No. I'd say the only stocks in my portfolios that meet that test are WOW, WES, CBA and to a lesser extent ANZ and RIO.

 

[icemanmelb]

Another issue that I mark down management over is the SPC Admona business. This has been a dog of a business for years. CCL should have got out of thus business a few years ago when it had a chance, or alternatively, come up with a plan to completely restructure the business from the ground up. Management don't seem to have had the capability to identify and implement the sort of radical restructuring that the industry has needed.

In essence my assessment of management is that the value of their flagship brand and their market power within key distribution channels are waning in their primary market (Australia) and they are not performing in their growth market (Indonesia) to anywhere near what I had expected them to.

From a fundamental/medium-term income investing point of view, I don't know if a grossed up yield of only 7% in a company (albeit with a sound balance sheet) that has performed poorly and has a stable but poor outlook (flat earnings), in the context of my personal assessment of management's performance, warrants my investment at the current price. I don't think at the current price the market has overshot to the downside.

I agree that they should have done something with SPC but now that they are going to keep going with this, I think it's a hard one if they are going to compete just on price ONLY. That ship has sailed and Gen Ys & Zs nowadays are more organic focus and environmental focus. That being the case, examples such as this is something management need to focus on besides cost cutting which contributes to the massive write down.

It's very competitive in Asia business wise. PNG & Indonesia is not exactly developed nations so strategy needs to include political risk, currency risk etc. Management was asleep behind the wheel when they didn't even put in a hedging plan when emerging markets fell due to QE (infinity) cut backs. Just look at most of the Gold Producers operating in those countries for some hints.

So currently it's not the kind of stock stable enough which one can buy and leave under the drawer for 10 years IMHO.

Ice

 

[Julia]

Would I be happy to buy CCL at the current price and walk away for ten years? No. I'd say the only stocks in my portfolios that meet that test are WOW, WES, CBA and to a lesser extent ANZ and RIO.

Any reason you've omitted WBC from that list, tinhat? I'm not questioning the absence of NAB, though it's done quite well for me and the yield is good.

Agree with you on the others, except that I avoid all miners.
PS Wouldn't even consider touching CCL.

 

[tinhat]

Any reason you've omitted WBC from that list, tinhat? I'm not questioning the absence of NAB, though it's done quite well for me and the yield is good.

Agree with you on the others, except that I avoid all miners.
PS Wouldn't even consider touching CCL.

Julia, the reason for omitting WBC is that it is currently not in my portfolios. I've held WBC and NAB over the past few years but I don't hold either at the moment.

 

[ROE]

The tides has turn Analyst now reverse the trend and say sell
Was it better to sell at $15 when they say Buy

 

[McLovin]

That's a pretty big thud for a large cap. Down 13% on Friday and then another 7% today.

 

[ROE]

That's a pretty big thud for a large cap. Down 13% on Friday and then another 7% today.

I pulled the rigger a bit early should have waited till today, at least my short doing better

 

[McLovin]

I pulled the rigger a bit early should have waited till today

I reckon there will be a bit of time with this, and what do they say about bad news?

 

[ROE]

I reckon there will be a bit of time with this, and what do they say about bad news?

Yah could be more bad news but I think other wise that why I buy.

The previous CEO is sleeping just like he did at Foster, he rode the trend but did little else, one of the reason
I didn't buy coke because of him.

I buy now for the new CEO, My theory she just clean the deck, set low expectation, so she can go about making thing right... she has a bit of work cut out for her...Coke has not been managed well... and if she can steer coke like she did at GrainCorp, coke will be ok and more prosper in the future.

Graincorp is an average business and she did a decent job there..Coke is a superb business with unrivalled distribution network so hopefully she can pull some magic with this asset.

and that what the market do to your SP when you came out with a downgrade surprise no one, even the bear wasn't even anticipate...

 

[Ves]

I reckon there will be a bit of time with this, and what do they say about bad news?

I still need to do a fair bit of digging to make sense of the alcohol side of the business and its earnings contribution going forward (from memory this will start increasing with a view to 2015?) and also SPC Ardmona.

But EBIT in 2014 if my calculations are correct will be about $708m (85% of 833m in 2013). Assuming that they can rebase their earnings over the next few years and recover in the range of 850-900m EBIT by 2018, and say 4% profitable growth then at $9 a share you'll probably get a total return of around 10%pa as a shareholder.

I would demand a higher return than that because there is no buffer in the event that earnings do not recover over the next few years (or worse there is further long-term deterioration) and profitability growth long-term is very limited. In other words, if their competitive position never recovers, there is little solace at current market price.

 

[McLovin]

Yah could be more bad news but I think other wise that why I buy.

The previous CEO is sleeping just like he did at Foster, he rode the trend but did little else, one of the reason
I didn't buy coke because of him.

I buy now for the new CEO, My theory she just clean the deck, set low expectation, so she can go about making thing right... she has a bit of work cut out for her...Coke has not been managed well... and if she can steer coke like she did at GrainCorp, coke will be ok and more prosper in the future.

Graincorp is an average business and she did a decent job there..Coke is a superb business with unrivalled distribution network so hopefully she can pull some magic with this asset.

and that what the market do to your SP when you came out with a downgrade surprise no one, even the bear wasn't even anticipate...

I agree with you. I like women CEO's. It's a lot harder for a woman to get to the top, so they usually get there because they are a genuinely good leader, not just because they're a member of the right boy's club.

Like Ves, I need to go and do some more work on this. I do remember thinking how ridiculous CCL's sp was at $15.

 

[skc]

I reckon there will be a bit of time with this, and what do they say about bad news?

They say bad news come in three. This is already the 3rd bad news.

1. 7 May 2013 - AGM trading update. H1 FY13 EBIT to be 8-9% down on last year. Full year FY13 to be flat. Reason: Indonesia was strong, grocery channel difficult with competitor discounting. SPC impacted by importing.

2. 4 Nov 2013 - Trading update. FY13 EBIT to be 5-7% down on last year. Reason: No post-election uplift in consumer spending. More aggressive competitor pricing. Indo demand slowed.

3. 11 Apr 2014 - Trading update. H1 FY14 EBIT to decline 15% compared to pcp. Reason: Grocery channel continue to struggle. Non-grocery channel soft. Cost inflation in Indo + currency depreciation. SPC improving.

While the usual 3-count is in, there's certainly no sign of a turnaround yet. Several aspects of these updates were quite concerning imo.
- The reason for the decline has changed every time. It feels like they don't know where the next fire will be.
- They actually experienced flat/rising volume. So margin is eroding (as opposed to people suddenly got healthy and stopped drinking coke). This just spells classic manufacturer squeeze.
- H1 numbers were against a weak pcp. Given that H1 FY13 was already a drop of 8-9%, a further 15% fall means that EBIT has fallen from $402 to $318. That's a major fall considering this business is supposed to be stable

Oh.. Alison Watkins lost a heap of points in my eye by saying this in the first paragraph of Friday's announcement.

“I am delighted to be on board and have covered a lot of ground in my first six weeks having visited each of CCA’s major businesses and met with many of our key stakeholders. I am impressed with the calibre of the people at CCA, the strong competitive position we enjoy in our businesses and the strength of the relationship we have with The Coca-Cola Company.

Really? You are delighted?! You must be ecstatic now that the share price has fallen 20% in 2 sessions and close enough to a 5-year low.

Do I think she's being conservative and clearing the deck? Yes, most probably.

Do I think she's got an answer to the structural headwind? Nope.

But EBIT in 2014 if my calculations are correct will be about $708m (85% of 833m in 2013). Assuming that they can rebase their earnings over the next few years and recover in the range of 850-900m EBIT by 2018, and say 4% profitable growth then at $9 a share you'll probably get a total return of around 10%pa as a shareholder.

I would demand a higher return than that because there is no buffer in the event that earnings do not recover over the next few years (or worse there is further long-term deterioration) and profitability growth long-term is very limited. In other words, if their competitive position never recovers, there is little solace at current market price.

+1. $7.50 then it starts to get interesting. $9 doesn't quite do it for me.

 

[Ves]

do some more work on this. I do remember thinking how ridiculous CCL's sp was at $15.

I find it that when I need to go do a heap more work to figure out if I am missing much from my research (unless it is obvious) that I'm more likely to make a mistake.... almost as if psychologically you want the company to be a "buy."

I'm a little hesitant to dig much deeper at the moment for this reason, and as you said, it's probably not going any where fast at the moment (maybe lower...). The whole "this is a great company and now it's 30-40% cheaper" mixed with a confirmation bias you never realised you had can be dangerous! I'd prefer to wait until there is absolutely no noise and no one is talking about it.

Not saying that this happens to you, by the way.

 

[ROE]

Any reason you've omitted WBC from that list, tinhat? I'm not questioning the absence of NAB, though it's done quite well for me and the yield is good.

Agree with you on the others, except that I avoid all miners.
PS Wouldn't even consider touching CCL.

Shorting banks will be a better idea as we approaching May 13th
if there is any cut back on negative gearing as reported banks will get hit hard and could be a trigger point
for properties in Australia.

I closed my CBA short before XD and I short it again above $77 recently, I expect an easy 5-10% dropped
if there is change to NG in May budget

 

[icemanmelb]

Most guys have the attitude that if you don't sell, you haven't loss a thing saying.

The other being most bad news comes in 3's so now it's a good time to buy.

Both saying are just that and I personally think are traps.

Ice

 

[McLovin]

I find it that when I need to go do a heap more work to figure out if I am missing much from my research (unless it is obvious) that I'm more likely to make a mistake.... almost as if psychologically you want the company to be a "buy."

I'm a little hesitant to dig much deeper at the moment for this reason, and as you said, it's probably not going any where fast at the moment (maybe lower...). The whole "this is a great company and now it's 30-40% cheaper" mixed with a confirmation bias you never realised you had can be dangerous! I'd prefer to wait until there is absolutely no noise and no one is talking about it.

Not saying that this happens to you, by the way.

Great post, V. I agree. When you start from a position of this company is now on sale you can end up looking for little nuggets that confirm it is unjustly cheap while ignoring the elephant in the room.

Sometimes you just gotta listen to the little man inside you...

 

[Ves]

Thanks mate - that's half the battle.

Whilst I have not looked at it in any detail, I would not be surprised if CCL has enjoyed fairly high margins by world standards for bottling and distribution and long-term mean reversion (your old chestnut?) could be very possible.

This company is robust enough to survive, but lower margins means more bottles need to be sold and capital intensity in the long-term increases to maintain the same total return. Not ideal if you pay too much, multiples can contract very sharply.

You'd imagine if this can happen in Australia that PNG / Indonesia could bear fruit initially, but competitors will want a piece of that pie too. Incumbents can generate excess returns for a very long time, as is the case here (and my still be), but it can unwind quickly.

Being stuck in the middle of Schweppes' heavy discounting and WES / WOW bargaining power has not helped at all. Then there is the issue of health consciousness being detrimental to fizzy drink sales. Bottled water is a good substitute but Coles and Woolies do those for under a $1, not $3.50! When elephants throw their weight around there are usually no big winners, but often some big losers.

So many variables at play here. A simple business model with a mass of dynamic interference. Yep, the little guy tells me to tread lightly.