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Coca-Cola Bottling Co. Consolidated: Have A Coke And A Smile


  • Coca-Cola Bottling Co. Consolidated is engaging in territory expansion as part of Coke’s refranchising program.
  • Based on trailing earnings the company appears expensive with P/E over 33 on reported earnings.
  • Based on the territories intended to transition to CCBCC however the company will more than double its revenue base through 2017.
  • Company sells for a single-digit 2017 earnings multiple on the basis of my territory expansion estimates.

Coca-Cola Bottling Company Consolidated (NASDAQ:COKE) (OTC:COKEB), or CCBCC for short, is a relatively small Coke anchor bottler that has historically operated in parts of the Southeastern United States. Since the acquisition of Coca-Cola Enterprises' (CCE) North American bottling operations by the Coca-Cola Company (KO) in 2010, CCBCC has actually been the largest independent Coke bottler in North America. The company has limited scale, however, with 2014 revenues of less than $1.8 billion. Coke bottlers usually have little means for organic growth; they operate in fixed territories after all while the beverage industry is mature, which is why CCBCC's growth has historically come mostly through acquiring additional bottling territories. Growth at this company has, therefore, been relatively slow and unpredictable, which is why its business initially appeared as somewhat unattractive to me. It certainly did not seem like a company to own for growth and with its dividend yield currently below 1%, the company does not appear particularly attractive. However, beginning in 2013, something has changed that in my opinion will materially increase the company's size and profitability. The Coca-Cola Company, or TCCC, has under its 2020 Vision strategic plan committed to refranchising a substantial part of its distribution and local marketing operations currently performed by its subsidiary Coca-Cola Refreshments. In the picture below, the advancement of this process can be seen. The white territories are those currently controlled by Coca-Cola Refreshments, with brown territories held by independent bottlers such as CCBCC and red and red-lined territories those recently transitioned or those announced-to-be-transitioned under Letters of Intent. A substantial part of the brown area in the Southeastern United States is CCBCC's current territory.

Pictured above is a screenshot from the TCCC North America Update presentation given at the Goldman Sachs Global Staples Forum of May 12, 2015, one day prior to the

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I use value investing methods to search out favorable bets in the stock market. Follow me here ---> For a sample of my work please check out my Auhor's picks below.Top Idea #1: Zooplus, published Oct. 24th 2014 Top Idea #2: Coca-Cola Bottling Co., publ. May 20th 2015Top Idea #3: C&C Group, published April 27th 2018Disclaimer: all investment analyses and information written and published by me, as well as all comments, should not be considered as investment advice or used as such. All readers are strongly urged to perform their own research and due diligence on the equity shares and other investment products I have written about. I have no business or any other forms of relationship with the companies featured in my analyses, unless explicitly stated so in the article disclaimer.

Analyst’s Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in COKE over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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Comments (11)

Timberwolf Equity Research profile picture
Out today:

Update on the 2015 LOI (CCBCC stock touched all-time high on this news):


Timberwolf Equity Research profile picture
I have been asked by the SA Pro editors to write an update on my thesis regarding Coca-Cola Bottling Co. Consolidated, which is included below.

Since my idea was published in May of 2015 the stock has had a very strong run. It was trading around $112-113 at the time of publication whereas it now trades around $161-162 for a gain of roughly 43% or so. Not bad in 4 months. For a short time it even traded above $175, but it has come down with the market as a whole a little bit after reaching that peak. Somewhere in August there was a weird downward spike to $126 or so as well, which I attribute to sellers mistakenly concluding the agreement with Coke was terminated due to this announcement:

On August 24 CCBCC filed an 8-K (http://bit.ly/timberwo...) with the SEC announcing the termination of a letter agreement first issued in 2008. However, this agreement concerned an option awarded to Coca-Cola by CCBCC regarding the purchase of certain beverage brands owned by its subsidiary BYB Brands. After the purchase of this CCBCC subsidiary by Coca-Cola was completed in July 2015 the companies terminated the letter agreement of 2008. Apparently, some market participants thought this concerned the 2013 or 2015 letters of agreements and blindly sold (or shorted) their shares. Evidently, this was a costly mistake.

Turning to the company's performance since the publication of my idea; the company has since then reported Q2-15 results which in my opinion were quite impressive. Even though the territory transfers under the 2015 LOI have not yet taken place the company continued to reap the consolidation benefits from the territories transferred under the 2013 LOI. This can be seen clearly in the acceleration of quarterly revenue growth rates since Q1-14:

Q1-14 revenues +1.31%
Q2-14 revenues +7.11%
Q3-14 revenues +5.34%
Q4-14 revenues +11.74%
Q1-15 revenues +16.64%
Q2-15 revenues +33.78%

Since the territory transfers under the 2013 LOI letter were completed during May, August, October and December of 2014 and February and May of 2015 the first half of 2015 necessarily reaped almost the full benefit from these new territories. I expect the growth rate to decelerate during the second half of this year because of tougher comparables.

Organic growth was also quite strong in Q2 because CCBCC reaped both a volume and a pricing benefit from the expansion of Monster Energy sales in additional territories (due to the strategic agreement between KO and MNST of Augst 2014). Additionally, product sales to other Coca-Cola bottlers were also higher. In fact, Q2 growth was much higher than I anticipated, at least in part due to higher than expected organic growth. The anticipated margin impact was a little higher than expected, especially with regards to the gross margin. This went down to 39.49% in H1 versus 40.31% a year earlier but was down more in Q2, with a decline to 38.61% from 40.38% a year earlier. It's possible that the gross margin will come out lower than anticipated by me in the original thesis, although I don't believe this will impact the operating margin much. The operating margin was up slightly in Q1 but down a little in Q2. How this will eventually play out is very hard to predict, although it seems reasonable that the operating margin on transfered territories will be lower initially due to inefficiencies that will be worked out over time (such as those related to rerouting).

As to timing of the 2015 territory expansions; I have not seen new information on this, although it is important to observe that the first territory transfers under the 2013 LOI only took place a full 13 months after the initial announcement. It's possible that the 2015 territories will be transferred more rapidly (I expect they are by now well versed in this exercise) but I cannot say for sure.
In the second quarter 10-Q the company reported the following on this issue;

"The company is continuing to work towards a definitive agreement with the Coca-Cola Company for the proposed franchise territory expansion described in the 2015 LOI. There is no assurance that the company and The Coca-Cola Company will reach a definitive agreement for the proposed franchised territory expansion contemplated in the 2015 LOI".

As stated in the original thesis above, the Letter of Intent is exactly what its name implies and not an official agreement on an asset sale. Therefore, there remains a chance that the territory transfers will not take place. In my opinion this chance is small however, given that both companies involved 1) are long-term business partners, 2) Coca-Cola will continue to own a substantial equity stake in CCBCC, 3) the underlying rationale for the outsourcing of distribution activities by KO remains sound, and 4) the transfers agreed to under 2013 LOI were consumated according to plan.

Concluding my update; I believe that my thesis on COKE is so far largely working out as predicted. I do believe that the strong run-up in the stock has decreased its attractiveness as an investment opportunity at this point, even though there remains some upside under the original price target. For now I am sticking with this target for 2017 and I believe the stock can be kept if already owned. It's probably a good idea to keep a close eye on the company's SEC filings to keep updated on territory transfers etc. Additionally, there remains a chance that the company will agree to more territory transfers with Coca-Cola that could increase its potential business value. But since this possibility is far from certain it is therefore in my opinion impossible to assign value to. It can be considered a free call option that comes with the stock but remains far out-of-money until the event materializes.
Fantastic article. The Harrison Family and KO own the majority of the stock ; consequently, there is very little Volume. Thank you again for the article.
Timberwolf Equity Research profile picture
Thank you! I appreciate that!
Hardog profile picture

Good to know thought it was majority of KO didn't know abut the Family.
Timberwolf Equity Research profile picture
Some excellent questions, Nigel! I have based my operating margin assumption in part on the fact that expansion sales for 2014 had EBT margin of 7.54%. I have actually aimed below this since I presume that with larger territory expansions larger cost increases will follow as well. That being said I also presume the company will be able to realize significant advantages of scale in its SD&A costs, but given the low visibility on the expansion business' operating cost structures I agree that it's hard to tell how its gross margin/SD&A balance looks.

As to the gross margin; even with the expansion the company will still have relatively small scale, which I presume will come with a relatively high gross margin to enable the company to earn a decent profit. What should help is that the company will have the exclusive right to distribute Coke's beverage portfolio, so there's also a different competitive enviroment in this type of distribution business from say a food-service distribution business. Secondly, the company will start paying TCCC annual distribution fees for the right to distribute its products in these territories, which I have presumed will be included in SD&A, not as cost of product. Third, I have thought about using food distributor gross margins for purposes of comparison, but I think beverage distribution gross margins should be higher than food distribution margins. While the retail account part of the distribution business should be low margin, I expect that substantial percentages of sales will go through the food-service, convenience and vending machine channels, which should be higher margin sales because consumer prices in those channels are higher and the accounts are usually a lot smaller. In those channels your SD&A cost per unit sold should come out higher though. Fourth, I have intentionaly left out sales-to-other bottlers from my outlook because I don't know if these are currently sold into expansion territories. Those are low margin sales, which means legacy territory gross margin is actually higher than the one reported company-wide. If I had included those the gross margin would be somewhat lower on higher sales. Finally, the legacy business is likely to see gross margin expansion in coming years both through assumed pricing of +1.4% and favorable input costs in COGS. With prices for aluminum, resin and sugar all down the company should benefit from input deflation, which is unrelated to concentrate prices. A similar situation would apply to energy-usage in manufacturing and possibly to glass bottle prices paid as well. I have not explicitly included this in my model because it might not apply to 2017, but it may be an additional bonus.

There were prices on earlier transactions; $9.6 mln for Paducah/Pikeville, Cleveland/Cookeville at $16.4 mln, Knoxville $34.1 mln, Johnson City/Morristown $13.5 mln. There was also a territory swap where the valuation difference will be settled in cash. An interesting part about the LOI is that it states that the consideration to be paid for the territories will consist of a part A: 1) cash amount for the value of distribution rights to cross-licensed brands such as Dr. Pepper and Monster brands that are (owned by other companies but) currently distributed by CCR in certain of these territories. 2) net book value for the distribution assets and working capital involved in the transactions. And part B: the periodic payments made by CCBCC to CCR under the sub-bottler agreement for the right to distribute its beverage portfolio. TCCC has stated they expect to write off some intangible assets associated with the CCE North America acquisition of 2010 as a result of these transactions, but that they will recoop the value lost there through the periodic distribution fees. Based on that statement I assume the valuations paid for these territories are rather low on a basis of economic value, but that CCR will continue to reap part of the economic benefit through those distribution fees. This construction will lower the current capital outlays required by CCBCC for the acquisitions but arguably lower their future (operating) margins on these territories.

The forward debt level around $900 million more or less assumes it will double from 2014 levels because of these territory acquisitions. As a rough guide I have taken the territory expansion populations of 4.9 million between 2014 and now and proceeded to combine this with the cumulative acquisition price estimate around $85 mln (incl. asset swap). Concluding that they have paid slighly over $17 mln per 1 mln inhabitants I have concluded that forward expansion acquisition prices should total $421 mln (24.3 mln inhabitants * $17.35 mln). With 2014 debt levels around $445 mln that should total $866 mln by 2017, which I have rounded upward to $900 mln. This is a rough estimate but the best I could come up with. With modest free cash flow being eaten up by the dividend in 2014 I have assumed they will not be able to decrease the acquisition debts very quickly (especially since they will face elevated capex and possibly additional working capital expansion as well). Hence the $900 mln, only half of which should be related to acquisition costs going forward.
Nigel Stevenson, CFA profile picture
Hi, thanks for your reply. In the past, I have looked (briefly) at some of the downstream companies which work with TCCC (Swire as a bottler and Rexam as a can supplier). As you point out these tend to be the capital-intensive parts of the business, while TCCC keeps the value-added parts in-house. It strikes me that TCCC basically "allows" these companies to earn their cost of capital with an incentive to increase profits by reducing costs and improving efficiency. My concern would be that in what is a tightly negotiated arrangement it is unlikely profits would increase that much unless there is a large investment requirement, in which case the actual value created may be limited. I may of course but wrong but that would seem to be the biggest risk, particularly given the high level of uncertainty.
Timberwolf Equity Research profile picture
Agreed, their CAPEX will go up strongly. But even if this is the case you would still only pay 0.25x forward sales. Another interesting thing; in 2014 and Q1 of 15 margins have actually gone up, despite increased weight from the territories under the LOI13. As for the downstream profitability in the Coke system, there are lots of Coke bottlers that earn decent if unspectacular profits. Given that these markets are mature I expect CAPEX will be almost entirely replacement spend. Also important to remember is that KO owns 34.8% of COKE stock and that they're using Swire and CCBCC as distribution-platforms: their engagment in this effort is very useful to KO. It seems unlikely to me that those companies would engage in these efforts without seeing significant potential in them.
Nigel Stevenson, CFA profile picture
Thanks for the research. I have a couple of questions. You are effectively assuming an incremental operating margin on the new distribution only sales of around 6-7% compared with current bottling and distribution margins of c5%. This seems quite high. Wouldn't the distribution only gross margin be much lower than 35%? Have I misunderstood something? How did you arrive at the $900m acquisition cost? Are there any precedent prices disclosed for previous transactions? Thanks
Great in depth analysis. Hopefully this continues working, I've been involved for awhile. Thank you for the work.
Timberwolf Equity Research profile picture
Thanks for your appreciation! I think this idea has a high likelihood of working out.
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