NASDAQ:COKE Coca-Cola Bottling
Sector financial performance:
This company, which primarily produces and markets non-alcoholic beverage as Coca-cola bottler, has been grouped into non-alcoholic beverage sector.
It seems that companies in this sector are experiencing changes in consumers’ taste and the transmissions of those changes across global markets as the total trend of consumers’ preference is shifting to non-carbonated beverage from traditionally dominating sparkling products. Sales volume data indicates that demand for CSD beverage has been declining globally with an annual rate of about 1% and the demand for non-carbonated beverage increased about 4% annually in the past several years. The global decline in demand for CSD is particularly due to large decline in developed market. For example, the decline in CSD beverage in US market led the whole volume in this market go down by 2-4% in 2016/17 while the decline seems to be being offset by picking up of non-carbonated beverage in 2018. Globally, driven by increasing in developing market in both CSD and non-carbonated categories, the demand has been increased as indicated by 1-2% annual growth in volume. Accompanying with declining demand for traditional sparkling beverage, we have seen the average price has been rising at an about 2-3% rate globally in the past several years and the price growth rate is lower in US market (1-2%) during the same period. The rising average price has resulted from rising unit price and product mix’s shifting to higher price products.
As a result, as described above, of the changes in consumers’ shifting away from carbonated beverage in US market, the declining demand for CSD beverage hurt more the bottling only companies than brand beverage companies in this industry as indicted by these bottlers’ declining growth rate of can/bottle volume and shrinking gross margin according some of typical bottlers.
Due to strong demand and as well the fact that only a few of brands are dominating market, for those brands owners and manufacturers of beverages the gross margin and operating margin have been kept at high level and seemed to be being improved. In the past several years, with favourable product mix shifting to high price products and reducing commodity costs and business shifting to higher margin operating (franchise), the average gross margin of typical companies in this sector reaches almost to 60% and operating margin to 22%.
However, when talking about the bottlers who have no own brands, their gross margins seem to have decreased largely (down by about 600 basis points in gross margin and by 500 basis points in operating margins, according to a typical bottler). Obviously, the increased margin resulted from shifting of product mix as seen from brand companies was not transferred to bottling sector or at least to some of bottlers who were not able to flexibly adjust their business to adapt new changes in demand.
According our analysis, brand companies’ enterprise price/adjusted EBI is around 31 in a range of 29-35 with interest/EBI ratio of 7%. Bottlers/private label companies’ enterprise price/sales is about 0.7 with gross margin of 34% and EBI/sales ratio of 0.5%.
It seems that this company continues to gain increase in sales by acquisition. Data indicates that its sales volume to retailers has increased but at apparently decreasing rate while price/mix has kept increasing in the past several years. Increase in still beverage has been much faster than increase in sparkling beverage.
For the first three quarters of fiscal 2018 compared with same period of 2017
The bottle/can volume to retail customer of this company (excluding acquisition) was flat. The price per unit increased about 2.7%.
For fiscal 2017 compared with 2016
The bottle/can volume to retail customer of this company (excluding acquisition) increased about 1.6% primarily attributable to the increase of 0.2% in sparkling beverage and increase of 4.9% in still beverage. The price per unit increased about 1.4%.
The bottle/can volume to retail customer of this company ( excluding acquisition) increased about 2% in first half year of 2017 compared with the same period of 2016 primarily attributable to the increase of 1% in sparkling beverage and increase of 4% in still beverage.
The bottle/can volume to retail customer of this company ( excluding acquisition) increased about 3.3% in 2016 compared with 2015 primarily attributable to the increase of 0.8 in sparkling beverage and increase of 10% in still beverage ( energy beverage mainly). Bottle/can sales price per unit increased 0.9% due to shifting of product mix to higher price- energy beverage and increase in all categories except for water.
The bottle/can volume to retail customer of this company ( excluding acquisition) increased about 6% in 2015 compared with 2014 primarily attributable to the increase of 2.1 in sparkling beverage and increase of 20% in still beverage. Bottle/can sales price increased 3.4% due to shifting of product mix to higher price- energy beverage and increase in all categories except for water.
This company’ gross margin has decreased from 40% of 2014 to 34% of 2018 primarily due to increased costs in purchase of finished goods, raw materials, and transportation and lower margin as a result of acquisitions. Its current operating margin has thus been down to about 1%.
This stock currently has an enterprise price/EBI ratio of 130 ($219/share), which we think, is relatively overvalued compared with its peers with concerns about the continuingly increasing costs.
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