Simon Shields

Coca-Cola is one of the best known brands on the planet.  Coca-Cola Amatil (ASX: CCL) has an exclusive franchise granted by The Coca-Cola Company (NYSE: KO) to sell their products in Australia, NZ, Fiji and a large part of Indonesia.  KO owns 30% of CCL, it sells CCL the syrup, provides some marketing support, and CCL does the rest. What could go wrong?

As it turns out lots of things. 

10 reasons why we are short

1. Consumers are trying to cut down sugar and sugar substitutes in their drinks.

The chart shows a consistent per capita decline in US soft drink sales. In 2017 sales of US Soda drinks fell for their 13th year in a row, to their lowest level since 1985, when Beverage Digest (a trade publication) began tracking consumption trends.

The trends are much the same in Australia, with CCL itself recently stating that changing consumer preferences, and concerns about sugar in particular, are impacting sales.

2. Coke’s water business is struggling too, with CCL recently noting the proliferation of private label water that is undercutting their premium Mount Franklin brand, and crowding it out from supermarket shelves. 

3. CCL is complaining of a persistently deflationary retail environment, which makes it hard to recover lost volumes and increasing costs through price rises. 

4. There are increasing regulatory imposts including container deposit schemes. CCL notes that their near term earnings will continue to be impacted by the implementation of container deposit schemes in NSW, Queensland, ACT and Western Australia. 

5. Indonesia isn’t working out for them with more capex required, weaker than expected macro-economic conditions, and lower than expected consumer spending in beverages. CCL stated that in Indonesia in 2018 so far there has been a beverages value decline of 1% and a volume decline of 2%.  

6. The business has been struggling for years, and its getting tougher. Following an EPS decline of 37% for the 3 years 2012 – 2014, CCL set out to achieve the modest target of mid-single digit EPS growth. It was able to do this for the next 3 years with an EPS growth averaging 4%pa.  However, here we are in 2018 and now even these modest growth targets cannot be met with the EPS likely to decline in both 2018 and 2019. 

7. The 30% ownership of CCL by KO remains a long standing conflict of interest.  KO sells syrup to CCL, and the more syrup it sells and the higher its price, the better off KO is. With its 30% shareholding KO is effectively able to control the board if it wishes.  At a management level, CCL is part of the Coca-Cola system, with staff moving between KO and other Coca-Cola bottlers such as CCL. 

8. It’s expensive. CCL trades on an FY18 PE of 16x with a declining earnings outlook. 

9. It’s dividend yield of 5.5% is reliant on a payout ratio of 85%. With any significant fall in earnings its dividend level will be at risk. 

10. It’s not a crowded short trade, with only 3.4% of CCL’s capital shorted.

Further insights

Monash Investors Limited aims to achieve their objectives by investing in a small number of compelling stocks that offer considerable upside, and by shorting expensive stocks that are at risk of falling. Find out more here


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Mr T

couldnt agree more with this. prospects for the company are hopeless. even if it buys a new 'growth product' (like bottled water years ago), it still has the legacy business dragging the chain. a slow motion train wreck! (ps - presumably there is some unpredictable risk for shorts that CCL is propped up by KO reducing syrup prices for example which make it less attractive for shorting?)

Justin O'Kane

I'll give you some things you have missed. Between 2004 and 2013 management at CCL put CSD 'Revenue per case' in Australia up 42%. Surprisingly volume dropped (!) By Jan 2018 rev per case is 6.5% lower than 2013 as "new management" attempt to undo and correct the volume fall ...there is your Aust profit crunch. Aftre the price correction the 2004 and 2017 average price increase is 2.25% and guess what volumes in sparkling are starting to stabilise! Who would have guessed? Non-sugar CSD consumption is trending up and it's likely volumes exceeds sugar based CSD. This trend is continuing, especially in the 14-24 age bracket. One reason to short CCL in the past was the behaviour of Asahi. Their purchase of Cadbury Schweppes Aust coincides with the down fall of CCL, especially under Davis...probably a worse CEO than Don Argus. Asahi's aggressive pricing has kept inflation out of the CSDs industry. I suspect they haven't made profits for years. Now the price differential has narrowed it will be interesting to see their next move. And last....many of the above arguments should be applicable to NZ but NZ is very strong for CCL. How come?