The Valor Blog.
Investment News and Views, Direct from Our Team.

A lesson in limited reinvestment opportunities…

Coca-Cola Amatil is a very good business. They are just not very good at allocating their excess cash. When a company with strong cash flows feels compelled to invest purely because they have excess cash, it usually results in making over priced acquisitions. The company should either buy back shares if their share price is undervalued, or pay out extra dividends. De-worsifying into canned fruit and average American beer brands is unlikely to be fruitful (pardon the pun).

There is a price to pay for Coca-Cola Amatil, however the multiple is below what its parent company is worth because it has limited reinvestment opportunities in its region. It is for this reason that we prefer the parent company to the Aussie listed nephew. It is the same for Nestle and its subsidiaries in India, Walmart and its subsidiary in Mexico. It is generally far better to invest in the parent company with unlimited reinvestment opportunities for growth than the locally limited subsidiary (unless the price for the local unit is significantly cheaper).

At current multiples, Coca-Cola Amatil is trading at approximately the same price as its parent company. With Coke (KO) using excess cash flow to buy back shares rather than de-worsify into average businesses, we know which company we prefer to own.