Investors seeking to refresh portfolios ahead of an anticipated global recovery in the New Year should buy shares in Coca-Cola HBC (CCH), the soft drinks bottler with leading market shares and a geographically diversified distribution footprint.

A consumer defensive with formidable cash generation and a progressive dividend, the £8.5 billion cap has performed with resilience through the pandemic while taking out cost. This has given the group considerable operating leverage to drive earnings higher which will help the shares re-rate once vaccines provide a route to a new normal in 2021.

SCREENS WELL
A Stockopedia screen reveals that Coca-Cola HBC ranks among the top quartile of companies seeing the best revisions to one and two-year forward earnings per share estimates over the last month.

Of those companies, the London and Athens-listed soft drinks giant is among the cheapest 25% of stocks in terms of the earnings yield, defined as earnings before interest and tax (EBIT) divided by enterprise value (EV). The shares trade on forward price to earnings multiple of 18.6.

UNDER THE RADAR
Though it is a FTSE 100 company blessed with sustainable competitive advantages, Coca-Cola HBC is arguably one of the least known stocks in the index.

It is a consumer packaged-goods powerhouse and strategic bottling partner of The Coca-Cola Company, giving it access to the world’s most recognisable soft drink, Coca-Cola, and an array of other brands besides.

Led by chief executive Zoran Bogdanovic, Coca-Cola HBC is the Coca-Cola franchisee for its territories, purchasing concentrate from The Coca-Cola Company to convert to finished products and receiving funds to help market Coke products.

Key strengths include international diversification; the drinks giant and its customers serve a market of over 600 million consumers across 28 countries in Central and Eastern Europe and Africa including markets such as Russia, Romania, Poland, Ukraine and Nigeria, as well as Ireland, Greece and Italy.

Cash generative established markets are supporting the growth in developing and emerging markets.

And furthermore, its drinks portfolio ranks among the strongest in the beverages industry, including products in the sparkling, juice, water, sport, energy, tea and coffee categories. Brands include the likes of Coca-Cola, Schweppes, Costa Coffee, Fanta, Sprite, Powerade and Monster.

Progressive dividend payer Coca-Cola HBC also has an eye for acquisitions; relatively recent examples include Italian natural mineral water-to-adult sparkling beverages company Lurisia and Serbian confectionery brand Bambi.

READY FOR THE RECOVERY
Despite the challenges posed by the pandemic, Coca-Cola HBC’s third quarter sales beat forecasts thanks to positive performances in Nigeria, Russia and Poland, three of its five largest markets. ‘Strongly improved trading’ was driven by a recovery in the out-of-home channel and further growth in the at-home channel, as markets continued to reopen following local and national lockdowns.

Bogdanovic said his charge will ‘deliver good profitability’ for a severely disrupted 2020. And as vaccines are rolled out globally in 2021, we think Coca-Cola HBC should prove a major beneficiary of a recovery in social events and international tourism.

Though Poland and Italy will introduce plastic and sugar taxes respectively in 2021, Coca-Cola HBC will pass these onto consumers and earnings should benefit from significant operating leverage, having cut costs and reprioritised capital expenditure to reduce cash outflow, when the recovery comes.

Even if the pandemic rumbles on for longer than expected, this consumer defensive has the balance sheet strength and adequate liquidity to enable it to weather what remains of the Covid crisis.

Investment bank Jefferies continues to see ‘a favourable growth outlook both in the aftermath of the pandemic and over the medium term with the business capable of mid single digit sales with margin expansion. Volume growth in August and September when lockdowns were temporarily lifted points to strong consumer appetite for out-of-home consumption experiences, which should bode well for Coca-Cola HBC in the recovery phase’.

Capitalising on the hard seltzer trend

Hard seltzers are all the rage in the drinks industry with companies racing to launch products as the market starts to gain traction. Hard seltzers are alcoholic flavoured sparkling water products usually infused with fruit. They are considered by many people to be a healthier alternative to other alcoholic drinks.

Coca-Cola recently launched a hard seltzer called Topo Chico in selected Latin American markets and Coca-Cola HBC is helping to launch the brand in Europe this year and in 2021.

‘Looking at the very strong performance of hard seltzers in the US, but also more recently in UK and Ireland outlines a very attractive business case across Europe,’ says Jefferies. ‘Hard seltzers offers a more refreshing alcoholic option and is expected to source volumes from beer and other alcoholic categories such as wine, spritzers and cocktails.’

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