We reiterate our long-term ‘Neutral’ recommendation on Coca-Cola Enterprises Inc. (CCE) with a target price of $27.00 per share.
Coca Cola Enterprises is engaged in the marketing, production and distribution of non-alcoholic beverages, which include some of the most popular brands in its product portfolio. The company’s product assortment encompasses a full range of beverage categories, including energy drinks, still and sparkling waters, sports drinks, fruit drinks, juices, coffee-based beverages and teas.
The divestment of Coca-Cola Enterprises’ North American operations to Coca-Cola Company and the acquisition of the bottling operations of Coca-Cola Company in Norway and Sweden are positive steps. This will result in the company’s expansion in Western European territories, which have higher growth opportunities than the U.S.
The company’s overt dependence on carbonated beverages in an environment of declining carbonated soft drink demand has prompted management to redirect their focus on higher-margined, non-carbonated beverages and low-calorie sodas. In such a drive, Coca Cola Enterprises acquired the FUZE beverage brand (energy drink) and diversified its product portfolio by entering into a distribution agreement with Campbell Soup Company (CPB).
Additionally, the company has always kept its commitment to shareholders by returning surplus value. Coca-Cola Enterprises has maintained a dividend CAGR of 13.4% in the last five years. Additionally, the company is anticipating an annualized dividend of $0.50 per share in fiscal 2011. The company has also initiated a $1.0 billion share repurchase program in October 2010, out of which Coca-Cola Enterprises has already purchased $200.0 million of its shares during the fourth-quarter 2010. Furthermore, the company plans to purchase $800.0 million of its shares by the end of the first quarter of fiscal 2012.
On the other hand, Coca Cola Enterprises faces intense competition from its rivals, such as PepsiCo Inc. (PEP), Dr Pepper Snapple Group Inc. (DPS), and Kraft Foods Inc. (KFT). The company also encounters competition from local and regional players in the respective countries of operation. Consequently, the company is under severe stress to maintain profitability. The company’s primary competitor, PepsiCo, has a greater market share for non-carbonated beverages, which may place Coca-Cola Enterprises at an obvious disadvantage.
Furthermore, the company purchases its entire requirement of concentrates and syrups for Coca-Cola Trademark Beverages (which constitutes 90% of its total sales volume) under a five-year agreement with The Coca-Cola Company (TCCC). Any conflict of interest between the two companies would have an adverse impact on the company’s future operation.
Increasing cost of raw materials, ingredients, or packaging materials, such as aluminum, HFCS (sweetener), PET (plastic), and fuel or other cost items is a major concern for the company. Given the fiercely competitive non-alcoholic beverage market, the company may not be able to pass spiraling expenses to its customers because of fear of losing them. Coca-Cola Enterprises holds a Zacks #3 Rank, which translates into a short-term Hold recommendation.
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