Things Still Go Better With Coke

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The company is included in ALL-ORDS and ALL-TECH

– Coca-Cola Amatil 1H guidance slightly disappointing
– Volumes and revenues solid, costs higher
– Guidance historically conservative, brokers remain broadly positive

By Chris Shaw

Coca-Cola Amatil ((CCL)) held its annual general meeting yesterday and at the meeting offered initial earnings guidance for 1H11 of net profit growth of around 5%. This suggests a result of $232 million, with both volumes and revenues solid but some cost increases impacting on earnings.

Much of the expected increase in costs stems from Cyclone Yasi and the recent floods in both Queensland and Victoria. A stronger Australian dollar is also impacting on earnings.

The guidance from management was below the forecast of RBS Australia and so means some modest cuts to earnings forecasts. Others have followed suit, with the likes of Macquarie, Citi and BA Merrill Lynch also trimming earnings estimates. 

Changes have been modest, as for example both Citi and RBS have only lowered numbers by 2% for the full year and Credit Suisse has trimmed its forecast by 4%. Consensus earnings forecasts for Coca-Cola Amatil according to the FNArena database now stand at 71.9c for FY11 and 78.3c for FY12 in earnings per share (EPS) terms.

The changes in forecasts have had little impact on price targets, as the database shows a consensus price target for Coca-Cola Amatil now of $12.45, down only slightly from $12.49 prior to the update from management.

There remains a reasonable spread of ratings for Coca-Cola Amatil, the database showing four Buys, three Holds and one Underperform recommendation. This comes from Credit Suisse, which has downgraded from Neutral previously to reflect the view the share price is unlikely to perform strongly while the business is experiencing something of a slowdown.

Others are not so negative, JP Morgan pointing out the comparative weakness in 1H11 trading is likely to be only a short-term issue. Given the cycling of weak comparable numbers and incremental cost savings from Project Zero, net profit after tax is forecast to grow by 14% in 2H11 on JP Morgan's numbers.

Citi is somewhat more cautious on the second half, noting soft consumer spending and the fact cost of goods sold tends to be higher in the second half of the year for Coca-Cola Amatil increase the downside risk for full year earnings. Having said that, Citi retains a Hold rating on the expectation there will be a return to trend growth over the medium-term.

On the plus side, Coca-Cola Amatil has a history of offering conservative earnings guidance at annual general meetings. JP Morgan notes on five of the last six times guidance has been provided the actual result has exceeded the guidance offered.

Deutsche Bank shares the view the earnings outlook remains positive, noting while FY11 numbers have been adjusted slightly to reflect the update from management, FY12 earnings are unchanged. This implies nearly 10% earnings growth next year.

When added to a relatively resilient business and solid growth prospects via value accretive projects in a number of markets, Deutsche continues to rate Coca-Cola Amatil as a Buy. Macquarie agrees, taking the view despite tough current conditions the growth opportunities for CCL remain intact.

What adds value in Macquarie's view is capital is invested to reduce costs and increase service. At the same time, Coca-Cola has a long-term pricing strategy to drive growth in coming years. RBS Australia also expects strong earnings growth through 2015, so with Coca-Cola shares trading at the bottom end of its historical range there is no change in Buy rating.

Shares in Coca-Cola Amatil today are stronger and as at 11.40am were up 8c at $11.85. Over the past year the stock has traded in a range of $10.67 to $12.74, the current share price implying upside of around 5% to the consensus price target in the FNArena database.
 

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