Coca-Cola European Partners plc (NYSE: CCEP). Reflecting soft demand at restaurants, convenience stores, and gas stations (i.e., away-from-home consumption), we expect revenue to remain weak over the remainder of 2020, though we look for improvement in 2021. In addition, with benefits from acquisitions waning, we believe that CCEP will find it difficult to maintain earnings growth. Given the less favorable outlook, we believe that CCEP shares are fairly valued at nearly 17.9-times our 2021 EPS estimate, in line with the peer average.
Over the long term, our rating remains BUY based on the company’s share buyback program and stable business.
CCEP, which reports revenue and earnings semiannually, and revenue quarterly through trading updates, provided a trading update on October 26. For the quarter ended September 26, CCEP reported revenue of $3.77 billion, a 3% decline. On a comparable basis, revenue was down 4% due to the negative impact of COVID-19 and a 4% decline in comparable volume. On a positive note, revenue per case rose 1.0%.
Separately, on October 26, the company announced a nonbinding offer to acquire 69% of Coca-Cola Amartil, one of the largest bottlers of ready-to-drink beverages and coffee in the Asia/Pacific region, for $7.7 billion including the assumption of debt. The transaction values Coca-Cola Amartil at 10.9-times 2019 EBITDA. We expect the acquisition to add $0.14 to annual EPS while adding a manageable level of debt.
As discussed in a previous note, due to the impact of the pandemic, first-half revenue fell 16.5% (down 16% in constant currency) to 4.84 billion euros ($5.74 billion). First-quarter volumes were down 14% and price/mix had a negative 2.5% impact. Operating profit of 398 million euros was below our estimate of 401 million euros as operating expenses were higher than anticipated, second-quarter volumes were particularly weak, and operating leverage was less than favorable.
Comparable 1H earnings were 0.57 euros ($0.68), below the consensus estimate of 0.58 euros ($0.69). The slight earnings miss was driven by higher-than-expected operating expenses, COVID-19 restrictions, higher input prices, and much lower away-from-home volumes.
Interest expense rose year-over-year to 55 million euros from 49 million euros.
Despite the suspension of share buybacks in the first quarter, diluted shares outstanding declined to 457 million from 475 million a year earlier.
Management said that away-from-home consumption was hurt by COVID-19 and that the segment operated at much lower levels than normal.
In its 1Q20 trading update, Coca-Cola European Partners withdrew its 2020 guidance.
In 2019, revenue increased by 4.5% (both as reported and in constant currency) to 12 billion euros ($13.06 billion). Comparable and constant-currency diluted earnings per share rose 10%, to 2.53 euros ($2.75), driven by the completion of the company’s 1.5 billion euro share buyback program. The consensus estimate had called for earnings of 2.52 euros ($2.74).
EARNINGS & GROWTH ANALYSIS
Based on prospects for modest sales declines over the next two quarters, we are maintaining our 2020 U.S. dollar EPS estimate of $2.08. We are also maintaining our 2021 estimate of $2.65.
FINANCIAL STRENGTH & DIVIDEND
Coca-Cola European Partners is taking steps to improve its financial strength. CCEP plans to postpone 200 million euros in capital expenditures, halt share buybacks, and cut expenses by 200-250 million euros.
On October 26, CCEP announced a semiannual dividend payment (which it had previously suspended) of $1.00 per share. The dividend was paid on December 1, 2020 to shareholders of record as of November 17.
At the end of the first half, total debt/capital was 61%, a manageable level in view of the company’s strong operating cash flow — 353 million euros in the first half of 2020 and 844 million euros in the prior-year period.
To raise cash, in the first quarter, the company issued 600 million euros in senior unsecured notes that mature in 2026 at an interest rate of 1.75%.
MANAGEMENT & RISKS
Damian Gammell became the CEO of Coca-Cola European Partners in December 2016, replacing John Brock, who has retired from the company. Mr. Gammell had been the COO of the new CCEP since its formation in May 2016, and had held the same position with the predecessor company. Before Coca-Cola Enterprises, he was the CEO of the Anadolu Beverage Group. Nik Jhangiani is the company’s SVP and CFO. He previously held the same positions at Coca-Cola Enterprises. He has also held management positions at the Coca-Cola Company, which he joined in 1998.
Risks faced by investors in Coca-Cola European Partners include increasingly negative consumer views of products containing sugar and artificial sweeteners, intense competition, and currency risk.
Coca-Cola European Partners distributes an extensive range of nonalcoholic beverages, serving more than 300 million consumers in Western Europe.
CCEP shares are up 14% since our last note on August 28, 2020. CCEP has traded between $37 and $58 over the last 12 months and is currently near the midpoint of that range. We believe that CCEP shares are fairly valued at 17.9-times our 2021 EPS estimate, in line with the peer average, and that a HOLD rating remains appropriate. If revenue growth accelerates or COGS growth slows, we would consider returning the stock to our BUY list.
On December 3, HOLD-rated CCEP closed at $47.50, up $0.90.