Is Coca-Cola Enterprises About to Bottle Rocket Higher?

Coca-Cola Enterprises (CCE) May 9, 2008 close: $21.49
52-week range: $21.37 [May 9, 2008] - $27.09 [Dec. 18, 2007]
Yield = 1.30% [seven cents quarterly- last raised Q1 2008]

Coca-Cola Enterprises is the world's largest soft drink bottler with 2007 revenues of $20.936 billion. They operate in 46 states plus Washington, D.C., Belgium, France, Canada, Holland, Luxembourg, and the United Kingdom.

CCE shares have typically been a good defensive choice in recessionary environments as soft drinks and bottled water are not high-end luxury items. The shares have a Beta of just 0.75 and Value Line rates them in the 85th percentile for 'stock price stability'.

A weak comparison in their Q1 [historically their slowest time of the year] has caused the stock to drop from last December's high of $27.09 to a new 52-week low last Friday. That over-reaction to a poor quarter in the seasonally weak March period has created a good buying opportunity in my view.

Company insiders have spoken agreement with their wallets.

Here are the latest reported insider transactions:

• May 1, 2008 CEO John Brock bought 20,000 shares @ $22.58 for $451,600
• May 1, 2008 CFO William Douglas bought 5000 shares @ $22.69 for $113,450
• April 30, 2008 Director Orrin Ingram bought 5000 shares @ $22.61 for $113,050
• Feb. 26, 2008 CFO William Douglas bought 5000 shares @ 24.50 for $122,500
• Feb. 20, 2008 Exec.V.P. Cahillane bought 40,000 shares @ 23.775 for $951,031
• Feb 15, 2008 CEO John Brock bought 20,564 shares @ 24.30 for $499,705

When the CEO and CFO are buying and no insiders are selling I think that's worth noting.

CCE shares have shown an average P/E of 17.18 over the past six years. Three of the past six years saw a multiple of > 18. In that same span debt to equity has been reduced from 4.32x in 2001 to last year's 1.65x.

Today's dividend yield of 1.3% is the highest ever for Coca-Cola Enterprises. CCE's payout ratio is just 18.67% leaving room for further increases as well.

I'm taking advantage of the recent sell-off to buy some shares and write [sell] some $25 puts for 2009 and 2010. We can buy now for less than the insiders paid over the past few months and not too far from CCE's multi-year absolute low prices. The dead lows hit in 2007 – 2008's horrendous market were $19.80 and $21.37 respectively.

Value Line sees 2008 EPS of $1.50. Zack's looks for $1.51/share. Both services now carry estimates of $1.65 for 2009. A return to 18 times this year's expectations would bring these shares back to $27 or up 25.63% from last week's quote. By year-end 2009 that would lead to a $29.70 target price.

Is that reasonable to expect? As noted earlier, CCE shares traded at $27.09 last December and right at $27 early this year. Revenues, dividends and book value have never been higher than they are now.

It looks like future profits for holders of Coca-Cola Enterprises are "in the can".

Disclosure: Author owns shares and is short puts in Coca-Cola Enterprises.

Comments

[mwswi]

According to Morningstar, CCE just hit a 52-week low today. Morningstar further states that 2008 will prove to be "another difficult year" for the two main domestic bottling arms of Coca-Cola (KO) and PepsiCo (PEP). The reason? Carbonated soft drink sales continue to decline in the United States.

That being said, Morningstar has been known to call 'em wrong. As you stated, there is no evidence of insider selling during 2008. All insider activity has been "buys" or "awards." So you do raise some very intriguing possibilities.

A small investment in CCE, while catching it or near its 52 week low, may just handsomely pay off. Good luck, Paul.

[Paul Price]

See ZACK's late December write-up here on SeekingAlpha to see more reasons to like this one.

Ironically, when ZACK's loved the stock in late 2007 it was almost exactly at its 52-week high.

Nothing much has changed except that the price is way better [lower] now. I like to get a bargain - not buy momentum.