07 February 2008

Coca-Cola Enterprises - CCE - Another Zacks Top 10 for '08



Coca-Cola Enterprises, the bottler, not Coca-Cola (KO), the Dow component.

Stock #6: Beverage bottler toasts the future. This is the first full year the company will offer its recently acquired water franchise. They're continuing to diversify for greater growth and earnings.

Coke (KO) bought Glaceau of Vitaminwater fame, back in May.


So here is what Zacks has to say about CCE, from a post on Seeking Alpha from December 26:

Coca-Cola Enterprises, Inc. (CCE) is currently in the midst of a restructuring program that emphasizes a movement toward developing markets in bottled waters, juices and teas. On December 12, the company increased its 2007 guidance due to stronger than expected growth in the European region.

Coca-Cola Enterprises engages in the manufacture, distribution, marketing, and sale of nonalcoholic beverages. The company sells its products through wholesalers and retailers primarily in North America, the Great Britain, continental France, Belgium, the Netherlands, Luxembourg, and Monaco. Coca-Cola Enterprises was incorporated in 1944 and is based in Atlanta, Georgia.

On December 12 Coca-Cola raised its 2007 earnings outlook based upon tax savings and strong growth from European markets. The company now expects earnings of $1.36 and $1.39 per share, compared with previous guidance of $1.31 to $1.36.

The company is currently implementing a restructuring program to improve profit as it and other bottlers face higher costs for aluminum and other commodities and a shift in consumer taste away from carbonated soft drinks toward water, juices and teas. 2008 will mark the first full year the company will offer its newly acquired water franchise Glaceau.

In 2008 the Coca-Cola said it expects revenue will increase in the high single digit percentage range on higher volume and growth in new products. Within the last 30 days two covering analysts have increased their next-year projections, moving the consensus estimate higher to its current reading of $1.47 per share.

On Oct 24, the company reported a slightly soft quarter that still met analyst expectations. Net income for the quarter was $213 million, which produced earnings of 44 cents per share. Coca-Cola does have a strong history of beatings analyst projections, over the last four quarters having done so by an average of four cents, or 36.82%.

Coca-Cola's stock price has had an excellent year, gaining close to 30% in value. The move higher has been very smooth with no major turbulence or pull-backs.

On Dec 13, the day after the company increased its guidance, shares broke through an area of resistance just above $26. A few days later the 52-week high was established just above $27. The $26 dollar level should provide a nice base of support as this stock looks to once again move higher and tack on more gains.

In addition, the stochastic is providing an excellent signal that shares are not over-extended, indicating that their is room for this stock to progress higher. Look for the trend to stay in tact and continue to apply upward pressure to prices.


But between KO and CCE, which Coke is really going to see the benefits of product diversification? Matthew Reilly at Morningstar has a thought:

Coca-Cola has virtually all of the leverage in its relationships with bottlers like Coca-Cola Enterprises, charging them high prices for concentrates while focusing on marketing Coke brands. Using this business model, Coke has consistently delivered returns on invested capital that easily best our estimate of its cost of capital.

CCE is a very different story. Coke has been able to deliver such impressive returns in part because it leaves capital-intensive operations, such as mixing, packaging, and delivering finished beverages, to CCE and other bottlers. These operations require extensive capital investment and they offer low margins, in no small part because of the large markup on concentrates, the price of which Coke controls.

Coke also wields control through its 35% stake in CCE--just below the threshold that would require consolidation. In addition, Coke controls CCE's profitability by determining the level of "marketing support" that it refunds to CCE, which essentially amounts to a refund of concentrate purchases. The companies have been working to net these numbers out against each other, but it is clear that Coke holds virtually all of the cards in the relationship.


CCE has the inferior position in the KO/CCE relationship--apparently, CCE is Coke's bitch. And then there's the issue with our economic troubles, i.e. the weak dollar, high commodity prices, and the R-word. Morningstar is less sanguine on CCE's prospects in a recent Analyst Note from Greggory Warren:

While rising commodity prices have been a drag on food and beverage manufacturers alike for much of the past year, it has been far more of a burden on the carbonated soft drink bottlers. With commodity costs now expected to be just as problematic in 2008, we don't envision the bottlers receiving much of a reprieve from the challenges they faced over the course of the past year. The situation is bound to be even more difficult for companies operating mainly in the United States, like Coca-Cola Enterprises and Pepsi Bottling Group, where volume growth for carbonated soft drinks continues to be sluggish, the price of corn (a key input for the sweetener high-fructose corn syrup) remains at record highs, and a weak U.S. dollar has increased the cost of imported raw materials.

If that wasn't a clear enough panning of CCE, here's the wrap-up paragraph from that report:

We do not think Coca-Cola Enterprises has much going for it at present, and it's unlikely to substantially improve in the near future, given the maturity of its markets. This leaves no compelling long- or short-term rationale for buying the shares.

So Zacks and Morningstar are in complete disagreement over investing in CCE. Perhaps KO is the better option, over CCE?

Morningstar doesn't think much of that idea, either:

Today's Coke seems to be energized by the risk-taking that comes with rolling out new products--even if it has meant going outside of the firm to acquire hot brands like Fuze and Vitaminwater. To truly succeed longer term, we believe the company needs to be an innovator rather than a responder, and use its unparalleled network of distributors to separate itself from the competition.

This is why we feel it is critical for Coke to improve its relationship with its bottlers--something Isdell was not able to fully accomplish during his time at the helm. In order for Coke to continue leveraging the strength of its global distribution network, we feel the firm needs to find a better model for working with its bottlers longer term. Absent that, much of what Coke has done over the past few years to right the ship will start to come undone.
[Bold added.]

Perhaps an investor should wait and see if KO decides to play nice with its bottlers, before investing in CCE shares. Back to KO's shares, M'star gives KO a fair value estimate of $60, less than 3% above the current share price. Coke's not really on sale right now.



I'm not convinced that CCE is a Top 10 pick. Coke (the iconic company) isn't going anywhere, so on that front, it's a safe investment, but on the other hand, I'm not sure Coke (the stock) is going anywhere, either.

The only argument that holds any purchase with me is the idea that CCE is a downtrodden, slow-growth company that has weathered the last several years and is poised to breakout of its rut.

And then I read this uplifting piece by Neil Merrett, in today's top story from beveragedaily.com:

Coca-Cola will acquire a 40 per cent stake in US-based organic beverage group Honest Tea, as part of an ongoing drive to focus on non-carbonated alternatives for its brands.

...

Adopting this focus for beverage innovation comes at a crucial time for the company and its international bottlers, which have had some difficulty in meeting consumer demands in recent years.

Last year, Coca-Cola Enterprises (CCE), the group's main bottler in North America and Western Europe, said earnings per share were expected to fall between five and 10 per cent in 2007, compared to 2006.

It is a prediction that follows Coca-Cola Enterprises (CCE) decision to axe more than 3,000 jobs, and re-iterates the firm's struggle to realign its business with consumer demand.

CCE global revenues rose five per cent for the first fiscal quarter of the year to $4.56bn, thanks to stronger performances from juice, water and sports drinks in North America, and the expansion of Coke Zero into France and the Netherlands.

But volumes declined four per cent in North America, CCE said, as consumers left full sugar, fizzy soft drinks on the shelves.

CCE added that it also faced "great challenges" in the UK, with moves like renaming the fizzy drinks category "sparkling beverages", instead of the traditional "carbonated", not yet paying off.

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