Coca-Cola European: Biggar's Bottling Bet

03/20/2017 2:50 am EST

Focus: GLOBAL

Stephen Biggar

Director, Product Strategy, Argus Research Corporation

We are initiating coverage of Coca-Cola European Partners PLC (CCE), the world’s largest Coca-Cola bottler based on revenue, with a BUY rating, asserts Stephen Biggar of Wall Street's leading independent research firm, Argus Research.

Coca-Cola European was formed in May 2016 through the merger of Coca-Cola Enterprises with two other Western European bottling companies, Coca-Cola Erfrischungsgetranke GmbH and Coca-Cola Iberian Partners.

Although revenue growth is likely to be modest in the near term, we expect the merger to generate significant synergies that will lead to above-average EPS growth over the next five years (10% for CCE, versus 7.5% for peers).

Formed on May 28, 2016, through the combination of Coca- Cola Enterprises, Coca-Cola Erfrischungsgetranke GmbH and Coca-Cola Iberian Partners, CCE is the world’s largest Coca-Cola bottler based on revenue.

Coca-Cola European Partners distributes an extensive range of nonalcoholic beverages, serving more than 300 million consumers in Western Europe.

The new Coca-Cola European Partners is well positioned to generate significant cost savings over the next several years. Management currently projects annual pretax synergies of 315-340 million euros by mid-2019, which we expect to result in above- peer-average earnings growth.

In October 2016, CCE paid an initial quarterly dividend of 0.17 euros per share ($0.19). The current yield is about 2.1%. It plans to pay out 30%-40% of annual net income in dividends.

We think the dividend is secure and likely to grow, as we expect CCE to post annual EPS growth of 10% over the next five years. Our dividend forecasts are 0.72 euros ($0.76) for 2017 and 0.80 euros ($0.84) for 2018.

We believe that CCE shares are attractively valued at 15.7-times our 2017 EPS estimate, below the peer average of 20.4, and at a PEG ratio of 1.6, below the peer average of 2.7.

Our target price of $44 implies a multiple of 19.9-times our 2017 estimate and a PEG ratio of 2.0, still below the average multiple for peers. Including the dividend yield, our target implies a potential total return of about 28%.

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