Around £28 a share, is it time for me to buy this overlooked FTSE growth stock on the dip?
The FTSE 100’s Coca-Cola HBC (LSE: CCH) has dipped since its 31 July 12-month traded high of £28.52.
I think this is mainly due to profit-taking after a 36% rise from its 12-month traded low of £20.65.
Nonetheless, it appears a rare chance to consider buying the shares for investors who think it fits their overall portfolio aims.
What are its growth prospects?
Ultimately, rising earnings will power increases in a firm’s share price and dividend over time.
In theory, the business looks full of promise to me, as a strategic bottling partner of The Coca-Cola Company. This in turn is a core holding of legendary investor Warren Buffet’s Berkshire Hathaway. So far, so good, as far as I am concerned.
In practical terms as well, its H1 2024 results were strong. Organic net sales revenue jumped 13.6% year on year to €5.176bn (£4.33bn). Organic sales are a company’s revenue from its core operations, while reported sales include both organic and non-organic sales. Operating profit climbed 1.6% to €566m.
The company flagged potentially challenging macroeconomic and geopolitical backdrops in H2. The variety of consumer profiles in the 29 countries in which it operates also remains a risk in my view.
That said, it raised its key 2024 targets. Organic revenue growth is expected to be 8%-12% higher (compared to the previous 6%-7%). And organic earnings before interest and taxes growth is forecast to rise 7%-12% (from a 3%-9% forecast).
Consensus analysts’ estimates are that its earnings will grow by 12% each year to the end of 2026.
Are the shares undervalued?
I never buy stocks that look overpriced compared to their competitors or to their future cashflow projections.
On the key price-to-earnings (P/E) ratio of relative stock valuation, Coca-Cola HBC currently trades at 18.9. This is cheap compared to its peer group P/E average of 22.4.
The same can be said for its price-to-book ratio of just 4.1 against a competitor average of 9.6.
And it also looks a bargain on the price-to-sales ratio measure, presently trading at 1.2 versus a 2.3 average for its peers.
To translate all this into hard cash terms, I ran a discounted cash flow analysis using other analysts’ figures and my own.
It shows Coca-Cola HBC shares to be 43% undervalued at their current price of £28.10. So a fair value for the shares would be £49.30.
They may go lower or higher than that, given the vagaries of the market. But this underlines to me how cheap the stock looks right now.
Will I buy it?
I have focused on stocks that pay very high dividends since I turned 50 a few years ago.
Coca-Cola HBC last year paid a dividend of 93 euro cents (78p) that gives a current yield of just 2.8%. Analysts forecast that this return will rise to 3.4% in 2025 and to 3.7% in 2026.
Nonetheless, these still fall well short of the average 9% or so that I receive from my core high-yield stocks.
If I were even 10 years younger, I would buy the stock, as its earnings growth potential looks excellent to me. This should prompt a rise in the very undervalued share price and in the dividend too, I think.
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Simon Watkins has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
