MARKETS SPECTATOR: Coke canned

Morgan Stanley analyst Thomas Kierath says beverage maker Coca-Cola Amatil is facing margin pressure with little room to make efficiency gains.

Morgan Stanley has initiated stock coverage of Coca-Cola Amatil and is recommending investors sell the stock.

Analyst Thomas Kierath says the “franchise is on the wane”.

“It faces greater pressures from the powerful supermarkets and a price focused competitor (Pepsi),” writes Kierath in a research note. Coca-Cola Amatil “has few capex-led efficiency gains ahead”.

In the past five years Morgan Stanley calculates capital spending has improved business efficiency and boosted profits by 50 per cent during this period. “The recent significant cuts to future capex lead us to think efficiency gains are unlikely to be as material as they have been in the past,” says Kierath.

Selling to Australia’s dominant supermarket chains, Coles and Woolworths, is “tough” for Coca-Cola Amatil. Competing brands, especially private labels, are increasing in number. Coca-Cola Amatil’s margins are under pressure, says the Morgan Stanley analyst.

The stock, moreover, is expensive. It is trading at more than 17 times forecast 2013 earnings compared with the market which is trading around 12 times. “Coca-Cola Amatil looks expensive relative to both domestic and offshore peers,” says Kierath.

At 1407 Coca-Cola Amatil shares were down 27 cents, or 2.2 per cent, to $12.26. The stock has dropped 5.4 per cent in the last 12 months.

The benchmark S&P/ASX200 Index was down 33.744, or 0.7 per cent, to 4635.40. The index has gained 15 per cent in the last 12 months but has now fallen 0.3 per cent this year. In US dollar terms the index has dropped 12 per cent this year.