|Shares Out. (in M):||302||P/E||11.3x||8.5x|
|Market Cap (in $M):||8,230||P/FCF||NM||10.6x|
|Net Debt (in $M):||2,501||EBIT||1,121||1,206|
Coca-Cola Enterprises, Inc. is one of the world’s largest bottlers of Coca-Cola beverages. The company markets, produces, and distributes nonalcoholic beverages to 170 million people across eight countries in Western Europe: France, Great Britain, Belgium, The Netherlands, Luxembourg, Monaco, Norway, Sweden. CCE is the third-largest Coke bottler by volume, behind Coca-Cola Hellenic and Coca-Cola Femsa and accounts for roughly 8% of total Coca-Cola product sales by volume.
In October of 2010, CCE sold its North American bottling operations to The Coca-Cola Company and acquired The Coca-Cola Company’s bottling operations in Norway and Sweden. The purchase price of the Scandinavian assets was $870 million. With these transactions, New CCE was born. The company’s footprint now includes a group of what are among the fiscally healthiest European countries. In 2911, CCE had $1.1 billion of operating income against $8.3 billion in sales.
After the various transactions of the past couple of years, the CCE story is actually simpler than it may appear at first. The company believes it can grow revenues at 4-6% and OI at 6-8% over the long term. We anticipate that volume growth will average nearly 3% as the company adds juices, water, isotonics, and energy beverages to its staple Coca-Cola trademark brands and sparkling flavors. On top of this, we expect that pricing/mix will add about 2% per annum. This 5% growth in revenues should enable expansion in gross margins as well as modest SD&A leverage. ROI of 15% in 2011 should tick steadily higher.
The company says its goal is to grow EPS at the high single digit rate in the longer term. We think they are sandbagging. In the shorter term, management acknowledges that strong business results and share repurchases will lead to EPS growth above the long term objectives. What the market seems to be missing is that share repurchases are sustainable for a long time to come, which will allow much higher per share growth. This is because, in addition to $500-600 million or more of free cash flow per annum, the company has the capacity to add debt to the balance sheet. Management targets 2.5-3x Net Debt/EBITDA but is only at 1.7x now. This means that CCE can add a couple of billion dollars more to its buyback funded by the extra debt. The company would return a whopping 45% of the market cap thru 2014 if the debt is used to buy back stock. CCE could have EPS of over $3.50 in 2014 compared to $2.18 in 2011.
While share repurchase is one possibility for the debt capacity, the other is that CCE will buy The Coca-Cola Company’s bottling operations in Germany. As long as management does not overpay, this transaction would make a lot of sense. CCE has exclusive rights to negotiate with Coke. Germany is 15% of Coke’s volume in Western Europe and has the largest population in the region, with 80 million people. Germany is also below average on per capita consumption, which gives CCE room to improve. We think CEO John Brock will be smart about what price to pay for the German assets. If he does not like the terms, we think he will stick to the buyback. He has 25 years of experience with leading European beverage companies such as Interbrew and Cadbury Schweppes. In light of his background, he knows what bottling assets are worth.
What could screw this story up? Short of overpaying for Germany, which we think is unlikely, the biggest risk is probably new taxes on sweetened beverages. At the beginning of the year France levied taxes on beverages with added sweeteners. A similar tax could be put forth in Great Britain or elsewhere, especially when we are dealing with governments that need to raise money for increasing debts and deficits. Another risk would be escalation in consumers’ preference for health and wellness categories, but we do not think a sharp change is tastes is likely. Finally, it is important that CCE stay on good terms with The Coca-Cola Company. From what we have heard, the relationship between the two companies has never been healthier.