Coca-Cola Amatil Trading Update Lacks Fizz

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– Coca-Cola on Friday updated earnings guidance
– Guidance broadly disappointed (as predicted by some)
– Estimates trimmed across the market
– Credit Suisse downgrades to an Underperform rating

By Chris Shaw

On Friday Coca-Cola Amatil ((CCL)) offered a trading update to the market, management indicating net profit after tax growth for the second half of 2011 was likely to be in the order of 4.5%. This compares to previous indications of a result in excess of the 5.5% recorded in the first half of the year.

The update was no great surprise in the view of UBS, as consumer spending remains subdued thanks to a tough retail environment and given recent cold and wet weather continues to impact on demand for Coca-Cola's products.

The other factor impacting on earnings has been a dispute with Woolworths ((WOW)), Citi noting this has contributed to some margin pressure. A concern for the broker is this implies some questions with respect to the sustainability of consistent margin expansion that has been a feature for Coca-Cola Amatil in recent years.

The weather is no excuse in the view of JP Morgan, who had expected a better result given Coca-Cola is cycling a 4.7% decline in Australian volumes stemming from the wet conditions experienced at the end of last year.

This suggests to JP Morgan underlying performance was weak, as Project Zero had been expected to deliver around $10 million in earnings growth on its own and the guidance offered suggests pre-tax profit growth of around $18 million.

What could be a positive for Coca-Cola Amatil according to JP Morgan is evidence of some supply disruptions at competitor Schweppes, where operations are struggling somewhat given industrial action and carbon dioxide supply constraints.

To reflect the update from Coca-Cola Amatil, stockbrokers have been quick to adjust earnings estimates. JP Morgan has trimmed its numbers by 3.9% for 2011 and by 0.6% in 2012, while Citi's numbers have come down by around 1% in each year.

UBS has reacted more like JP Morgan in cutting its numbers for this year by 3%, while Credit Suisse makes no changes to its estimates. Consensus earnings per share (EPS) numbers for Coca-Cola according to the FNArena database now stand at 70.3c this year and 77.4c in 2012.

Looking forward, broker opinions on Coca-Cola Amatil remain mixed. Buy ratings continue to dominate with four out of eight, Deutsche Bank summing up the positive argument by seeing a premium for the stock as justified given solid management, an expected improvement in earnings growth in 2012, a strong balance sheet and defensive earnings.

Citi sees a Neutral rating as more appropriate given the potential for the Australian pricing dynamic, which is very important for earnings at Coca-Cola, to be threatened by the new grocery paradigm. While there is some scope for price increases next month to ease the pressure on margins, Citi continues to see earnings risk as to the downside.

Credit Suisse has gone a step further, downgrading to an Underperform rating on Coca-Cola from Outperform previously. This is a valuation call, as the broker sees scope for the stock to hold its historical average earnings multiple of 15.5 times despite moving into a period of slower growth. Credit Suisse currently has the only negative rating on Coca-Cola in the FNArena database.

Shares in Coca-Cola today are down in early trading and as at 11.10am the stock was 11c lower at $11.91. This compares to a trading range over the past year of $10.04 to $12.47. Relative to the consensus price target in the FNArena database of $12.92 the current share price implies upside of around 9%.

 

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