Coke's little Aussie bottler

There's no doubt that Coca-Cola is one of the greatest businesses on earth. Corner stores, supermarkets and entertainment venues the world over have virtually no alternative but to stock it. And, helped by omnipresent marketing, a fair proportion of the world's population seem pretty keen to drink it.

Sadly, Coca-Cola Amatil is a long way from replicating the success of its illustrious parent. Just like a billionaire's house cleaner, it gets to rub shoulders with some impressive company, but still does a lot of dirty work for a pretty small reward.

Coca-Cola Amatil is the leading supplier of carbonated beverages in Australia, New Zealand, PNG, Fiji, South Korea and Indonesia. The bottler pays a fortune for concentrated syrup from Coca-Cola and then gets the capital-intensive job of carbonating, packaging and distributing the final product.

Comparison

The difference in the two businesses shows up in a financial comparison. Coca-Cola Amatil achieves a pre-interest, pre-tax margin on sales of around 12%. The American parent, that has a far easier job, makes 28%. An even better indicator, though, is that Coca-Cola Amatil makes a paltry return on equity of around 6.5% versus a phenomenal 34% for The Coca-Cola Company. To us, that says a great deal.

Outsourcing the backbreaking and unprofitable work to bottlers has undoubtedly boosted the amazing performance of The Coca-Cola Company. But it has done so at the bottlers' expense. That's why we've been negative on Coca-Cola Amatil for a while, most recently in issue 119/Jan 03  (Sell/Switch to Foster's - $5.80).

The company's profit for the year to 31 December 2002 was $209.5m, down significantly on the previous year. But this wasn't a terrible result if one looks solely at the ongoing businesses.

Shining star

South Korea was the shining star and Australia performed well with earnings up almost 10%.

As usual, though, some of the company's markets experienced 'difficult conditions'. This year Indonesia was the biggest concern.

But after racking our brains, we can't remember the last time when there were not difficult conditions in at least one of this company's markets.

Coca-Cola Amatil did pay a final dividend of 10.5 cents, 50% franked, bringing the yearly total to 18.5 cents, up from 14 cents in 2001. This is an increase in the payout ratio and the company plans to continue paying 60-70% of earnings as dividends. And yet the yield is only 3.2%.

So, right now, there's not much reward for investing in this business. And it's our belief that even if Coca-Cola Amatil did start firing on all cylinders, Coca-Cola would soon come knocking on the door looking for a greater cut of the action. After all, Amatil can hardly function without the precious syrup.

We're unlikely to get excited about Coca-Cola Amatil unless it gets very cheap and, at current prices on a PER of 19, it's far from that. SELL.