Coca-Cola Amatil

At its AGM on Tuesday, Coca-Cola Amatil said it expected earnings before interest and tax to fall by 8%-9% in the first half of calendar 2013, before returning to growth in the second half mainly thanks to $10m-$15m of cost savings. Overall, full-year EBIT is expected to be flat.

With consumer spending weak, Australian soft drink sales have been slow and supermarkets have been reducing stock. This has been further compounded by aggressive price competition from Schweppes, the bottler of Pepsi. CCA bears the brunt of any price wars because it makes its margin on top of what it must pay to its 29% owner, the Atlanta-based Coca-Cola Company, for concentrate.

The profit warning follows a war of words between Coles boss Ian McLeod and CCA chief Terry Davis earlier in the week, after the former pointed out that Coca-Cola was 60% cheaper in Indonesia and the latter maintained that this was because CCA preferred to make it locally where labour prices are higher.

Quoted in The Australian Financial Review, Davis said: 'I could bring in cans from Indonesia cheaper than I could produce them in Australia but I'm not going to do that because I'm a believer that we have to have a manufacturing industry in this country, because if we don't, we do so at our peril.'

This plays into a general point we've long been making about corporate margins in Australia – that they'll have to come down – and ultimately Davis, or rather his successor, will need to focus more on shareholder returns and less on supporting our manufacturing industry.

The problems at CCA's SPC Ardmona also continue, with the high Australian dollar damaging its competitiveness against – you've guessed it – imported fruit and veg.

In some respects Terry Davis is right: we do need to have a national debate about whether we want our food and drink to be made here or abroad. But CCA shareholders will hope they don't get caught in the crossfire.

The stock is down 7% since we reviewed the company's full-year result on 19 Feb 13 (Hold – $13.93), putting it on a prospective price-earnings ratio of almost 18, which looks somewhat expensive.

We're trimming our price guides to reflect the weaker fundamentals and notching up our fundamental risk rating from low to medium-low. However, our maximum portfolio weighting increases from 4% to 7% because under our new approach to recommendations these weightings are based purely on risk rather than a combination of risk and price. HOLD.