CCLAF: An Obscure Stock
Board: Macro Economics
Where do I post this oddity – a quasi-analysis of an obscure stock?
The Value Board guys are a little weird; they would probably get upset that I am not doing a DCF analysis complete with schedules of numbers and pithy references to WEB.
Saul’s and Pencil’s Boards are sort of idiosyncratic and mostly intended to reflect the analyses of their founders, and I have neither the time nor inclination to analyze either of them. (That was a tiny effort at a joke -- sorry.)
The REIT board is outstanding, but I fear they would take the narrow view that an Australian bottling and distribution company is arguably not a REIT.
Aha, I have it! I really like the METAR people, and I have not posted there in a long time. Also, although this post is completely unrelated to METAR, so is everything else I have ever posted there. And they are very forgiving of almost anything that is not impolite as long as it is labeled “OT” – done!
OK, here goes – nothing at all about ridges or West Virginia; just a half-baked analysis of an obscure stock located down where everyone always has a headache because they are all standing upside down.
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Every seven years, like clockwork, I sit down at my old Underwood, haul out the wooden slide rule and the jade abacus my father brought back from his time in the Pacific theatre, gather up relevant documents, and do a complete, careful, in-depth analysis of a company.
Seven years ago . . . well, seven years ago I had not yet had this idea, so instead of analyzing a company I was watching the Pirates defeat the Washington Nationals 3-2 behind the pitching of Ian Snell and home runs by Freddie Sanchez and Jason Bay (all now retired from baseball). So when I say, “every seven years, like clockwork,” I am working off of one data point so far.
Anyway, the company I chose to analyze is Coca Cola Amatil – KO’s distributor in the Southeastern Semihemisphere and a strong brand portfolio play (CCLAF, CCL on the Sydney Stock Exchange, which opens by 8:00 PM NY time and is easily traded using IBKR (basic commission for stock purchase is $6.00)).
I first encountered CCL when it was recommended (IIRC) by the late, lamented MF Global Gains service, which was tragically terminated in its prime, the trusting members left to writhe in the agony of owning numerous stocks that could not be followed through any methods known to man or beast, the only salve being the ludicrous offer to join the insular, dogmatic, pedestrian MF Million Dollar Portfolio – which, predictably, welcomed this influx of internationally oriented newcomers with admonitions to the effect that it probably would avoid investing in oversea stocks.
But let us not criticize MDP here; I took my shots at it back at that time and think I at least winged it once or twice. No need to rehash old grievances, no matter HOW RIDICULOUS . . . sorry; I am done now.
I am now a member of MF Australia, which I recommend as an outstanding service. I also subscribe to Australian Edge, which I find useful as well. Nothing in this post comes from either of these sources. I want to be clear that everything in this post reflects my own research and my own conclusions, all with respect to a company I have followed for many years.
CCL has a long history of being a stalwart company and stock, but in recent months its stock price has been hammered due to uncharacteristically weak performance. The question is whether the new price correctly reflects CCL’s new long-term outlook, or instead reflects a short-term view of long-term prospects that remain solid. The former case would make CCL uninteresting; the latter means that it represents a rare chance to get one of the great Australian companies at a ridiculous discount.
For reasons set forth below, I believe that current market prices are based on faulty premises and greatly undervalue this company from a long term perspective.
CCL is a very strong buy; note, however, that the 2014 prognosis is for continued difficulty, which may well extend further into the future. Thus, current prices, as attractive as they are from a long-term perspective, may not be anywhere close to the bottom. Also please at least consider currency issues as you contemplate investing in CCL – ideally, all else being equal (which it never is), a US investor will invest in Australia when the US dollar is very strong against the Australian dollar and sell Australia when the opposite is true.
DISCLOSURE: After writing this, but before posting it, I increased my already substantial position in CCL to make it my largest non-MF-Pro holding. Further, I am prepared upon a 20% or more price dip (all else being equal) to double that holding.
I am going to assume that anyone who is interested has the fortitude and energy to get the basic facts about CCL on his or her own. Thus, I will proceed with analysis assuming such knowledge.
1. Problem # 1: Australian Beverage Sales.
Sales of beverages in the Australian grocery channel have suffered – stagnant volume at best, declining profits – for the following reasons:
a. A pricing war by CCL’s competitors.
1. In his final conference call, the old boss, Terry Davis, noted that competitors’ pricing is unsustainable and competitors are growing weaker year by year as a result. He stated that the pricing war is hurting the competitors, who are weaker than CCL.
2. A persistent analyst disagreed, pointing out that CCL needs to increase its volumes since unit pricing is declining (due to a new mix of units) – the analyst essentially suggested that the competitor pricing strategy is very much hurting CCL.
3. In contrast to Davis, the new MD, Allison Watkins, stated after her first review of the business (in May, 2014) that things in this channel are pretty bad, and the problems will continue and will have a significant negative effect on 2014 numbers. She did not in minimize the pricing threat, nor did she say it could not be maintained by the competitors. Instead, she depicted the overall Australian beverage problem as being very significant and requiring a number of different approaches and strategies. (She also fired the guy in charge of that division, apparently, despite friendly language about the change.) Watkins pointed out that non-grocery channel demand is also soft, suggesting that factors other than price competition are also having a large effect.
b. Weak consumer spending in Australia. This is, of course, what it is; there may be emerging signs that Australia is beginning to succeed in its transition from a commodity-dominated economy, but over the long haul economies come and economies go; we are focused on the company. And it will certainly survive the current economy.
c. An ongoing seismic market shift away from standard KO-type beverages in favor of healthier fare. One analyst was very concerned about this trend; Davis pointed out that CCL and its partner/large shareholder KO know how to handle such things and are in fact handling it with minicans, cold containers encouraging spontaneous single-serving purchase, etc.; and Watkins (new MD) seemed to take the “new market dynamics” problem – viewed as a whole – quite seriously. Watkins emphasized the many assets CCL has to enable a strong response to this overall problem of a “different era.” She seems to feel that the old division head was left at the gate by modern market developments.
d. Reductions in customer inventory. Obviously this will stabilize at some point and in any event has little long-term effect (my opinion).
Long term: This overall problem—Australian beverage sales -- is real and is the big one facing CCL. I will discuss my analysis of it at the end of this post.
2. PNG. PNG (Papua New Guinea) business was a problem because of a weak economy, which should be less of an issue as the LNG revolution bears fruit there.
Long term: No issue.
3. Alcoholic Beverages.
Reintroduction of CCL beer and cider brands is going very well.
Long term: significant strength; no problem at all.
Growth is great in this market, but profits are being clobbered by cost increases from three sources (i) devaluation of the Indonesian currency in the context of a strong Aussie dollar; (ii) large increases in the minimum wage and (iii) loss of economic support for fuel costs.
The two key long term factors here -- (i) significant growth and (ii) minimum wage increase -- both are very positive in the medium and long term for CCL (the latter enabling the middle class Indonesian consumer).
Long term – despite near term cost and currency headwinds, this is a massive long-term positive for CCL – a country with the approximate population of the US in which CCL is building a great business.
5. SPC (Fruit Packing Business from Acquisition).
The strong Australian dollar has enabled predatory competition from importers in this channel. As a result of dumping-type practices, CCL wrote off $400 million of capital assets in this business in 2013. One analyst seemed convinced that this entire business will fail, and the remaining $300 million of capitalized value will also have to be written off. Nonetheless, support by the Victorian government and a “buy Australia” campaign is working well and this division appears to be on the way to breaking even.
long term: Anyone’s guess, but currency effects tend to go in cycles. I am not concerned too much about this division in the long run – it will not define CCL for better or for worse, IMO.
Dividend, Debt and Balance Sheet. The balance sheet and cash flow remain “very strong” in the words of CCL honchos. Near-term debt maturities are pre-funded, and capex will diminish significantly in coming years because of the completion of recent large capex projects. This seems to be a non-issue, especially with the solid backing of KO. The dividend should be safe and if it were cut, absent any other changes, it would likely be a real buying opportunity. (Note, though, that special dividends are probably a thing of the past, at least for now.) Minor recent credit downgrades still leave CCL with investment grade ratings.
Long term: non-issue; a strength, not a weakness.
1. Indonesia and the alcoholic beverage business provide exciting drivers of long-term success.
2. KO seems to be a very involved partner/shareholder, possibly even to the extent of calling the shots. This is a very significant asset of CCL.
3. CCL must adjust to price competition in the short term (not really very troubling with KO’s backing and CCL’s strong financial situation) and new market dynamics in the ever-evolving future. Who better to do this than CCL/KO?
Look at the assets CCL brings to this endeavor: KO’s support and expertise; a massive brand portfolio; industry leader status in Australia and probably Indonesia; very strong cash flows and balance sheet; and recently completed massive capex in Australia enabling all kinds of rapid competitive actions and responses.
Let me make one more point here. When you drop a rock in a pond, you get two things: (i) a large wave racing out in all directions; and (ii) a small central “counter-wave” leaping up as the waters displaced by the rock rush back into the hole its descent created. The main wave is large, extended and enduring; the counter-wave is small, isolated and of little dynamical importance
In the world of beverages, the main wave is, sadly, obesity supported perhaps by various forms of quasi-addictive behavior (dependence of one sort or another on caffeine, sugar, HFCS, etc.). The trend – the main wave – is KO, SBUX, etc. The much smaller counter-wave – getting inordinate attention, IMO – is the reaction to that wave: healthy beverages, etc.
Do we really think that Coca Cola, Diet Coke and the like are going to be radically supplanted by Tasmanian pawpaw juice, etc.? Do we really doubt that CCL – not to mention KO -- can read the true trends and react to them? Which trend do you want to bet on from an economic (as opposed to idealistic) perspective: (i) a continuing obesity epidemic; or (ii) a surge of self-denying, healthy behaviors?
One way to view all the recent personnel changes and business upheavals at CCL is to suspect that KO has taken charge of things. As far as I am concerned, any management that WEB will invest in so strongly is one that I want actively involved here. (And now, having mentioned WEB, I could post this on the Value board if I wanted, but I still think those guys are a little weird.)
For your stock holdings, buy CCL in large quantities. For your beverage, drink water; you do not need anything else.
A Drumlin Daisy