JPMorgan has this morning upgraded Coca-Cola Amatil to overweight from neutral as it believes the investment case will gather momentum throughout 2013. It also raised its price target to $15.15 from $14.60.
JPMorgan believes the stock’s valuation has become supportive given the underperformance over the previous six months. It also notes moderating pressure from unit ‘cost-of-goods-sold’ growth and weak consumer spending. JP sees an expected step-up in Indonesian earnings and accelerating free cash flow generation as providing an opportunity for incremental earnings growth in the future.
Regarding the capacity for free cash flow generation, JPMorgan said strong operating cash flow and moderating capex will generate significant growth over the next three years. Given the balance sheet is already under geared, the market would begin to focus on the potential for value creation via a reallocation of capital toward acquisitions and/or on market buybacks.
On the back of all this, the broker believes the market will start to focus on the potential for enhanced shareholder value through acquisitions or capital management. JPMorgan notes that this has been a significant driver of share price performance in Amcor over the past six to nine months and believes it could have a similar effect on Coca-Cola Amatil’s share price looking forward.