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Analyst tips ‘premier brand curator’ Coca-Cola to outstrip industry rivals

By Ben Bouckley+

18-Dec-2013

The Coca-Cola Company is a ‘premier brand curator’ in consumer staples whose virtuous brand and product innovation cycle equips it grow faster than industry peers in the next three to five years.

That’s the view of Wells Fargo Securities analyst Bonnie Herzog, who said in a note today that the company was still the “top pick” in her firm’s beverage investment universe and is on track to realize its 2020 Vision.

She places her confidence in factors such as (1) the reinvigoration of Coke in the US and the global success of Coke Zero (2) Strategic acquisitions like Honest Tea, Glaceau and Innocent (3) Meaningful innovations in brands like Del Valle in LATAM and Minute Maid Pulpy (now a $1bn Chinese brand).

Herzog also welcomed Coke’s announcement last week that it is transferring its North American (NA) bottling operations Coca-Cola Refreshments (CCR) from the NA segment to its global Bottling Investment Group (BIG).

Coke thus made good a pledge earlier this year to hand back US distribution rights to local bottlers, after bringing its North American (NA) bottling operations in house in 2010.

Coca-Cola Refreshments in ‘bottler hospital’

Given early signs of success after granting larger territories to five local US bottlers this April (representing circa. 5% of volumes), Herzog said Coke decided to transfer CCR to “bottler hospital” segment BIG, to improve operations and drive cost savings and efficiencies.

“We expect the next phase – perhaps in early 2014 – to involve the transfer of further territories (perhaps 10-20%+), as Coke continues to offload CCR’s distribution territories to local bottlers in an effort to better serve local markets and address both retailer and end customers’ localized and specific needs,” she wrote.

As Coke franchises new territories to bottlers, Herzog believes the value of BIG will remain attractive, given ongoing payment streams (lease payments for US territory rights) and the retention of valuable bottling assets.

“While it is still early and there are too many unknown variables remaining to definitively determine the exact end outcome in Coke’s refranchising initiatives, we believe one strong possibility for its next step will be to spin-off BIG into either a publically traded entity or sold in part or whole to existing bottlers,” she wrote.

Coke’s share price could soar

Regardless of who bought BIG, if this even happened, Herzog said Coke’s bottling operations were attractive and would command a good price, and any sale would likely improve margins for both BIG and The Coca-Cola Company itself.

The analyst said that around 40% of Coke’s North American revenue comes from bottlers, but that these “low margin, high-CapEx” bottling operations would be transferred to BIG.

Enterprise value (EV) is used by analysts to discuss the aggregate value of a company, and – as a measure of how much one might have to pay to acquire it – represents the sum of its market capitalization (share price multiplied by number of outstanding shares) and net debt.

EV/EBITDA is the ratio between enterprise value and cash flow, and using Coke’s three-year average EV/EBIDTA multiple (13.5x), Herzog said its own EV could increase 5-10% by simply valuing the bottling arm separately, and a subsequent higher earnings multiple could boost the share price 10-15%.