Is there another profit downgrade in Coca Cola Amatil's future?

Is there another profit downgrade in Coca Cola Amatil's future?

A blog post last year regarding Coca-Cola discussed the implications of a change in the pricing model that determines how much CCL must pay the parent company (Coca Cola) to purchase the cola concentrate.

The blog also mentioned some of the structural challenges facing CCL as a result of changes in consumer behaviour.

Last week, CCL issued a trading update that detailed the company’s performance for the year to date.

So far, sales have been weaker than the corresponding period last year and therefore net profit after tax is expected to decline. Since the prior blog article (written in late October 2016) the CCL share price had rallied steadily, reaching $10.72 prior to last week’s announcement.

Since the announcement, the share price has dropped by approximately 15% to the current price of $9.33. This is back below October’s price and is certainly unfortunate for those shareholders who had been riding the price up.

Click here to read my prior article on Coca-Cola.    

The company is currently in the process of implementing cost optimisation programs and sales of non-core property which management hopes will counteract the structural changes facing the industry.

Part of this strategy involves shifting the product mix to include other beverages such as bottled water (both flavoured and unflavoured) and coffee. Various innovations to the original coke product have had mixed success.

Coke zero is a successful product although more recent innovations such as Coke Life haven’t been successful. 

CCL have also announced a share buy-back program and since the February announcement $14m worth of shares have been bought back. Last week’s announcement mentions that the on-market buy back will resume on 26 April with up to $350m worth of stock to be bought back.

With a current market capitalisation of approximately $7.2bn, the buy-back constitutes around 5% of the issued shares of the company and should help to support the share price despite the announced profit downgrade.

Considering that here at Rivkin we generally believe that the first profit downgrade portends further downgrades, it may be best to stay out of this stock for the time being.

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