Over the past month, the Coca-Cola HBC (LSE:CCH) share price has fallen by 36%. Such a large fall in a short period of time usually correlates to a sizeable shift in the fundamental value of a business. However, I think that the fall has been overdone, and actually think that CCH shares are undervalued at the moment. Here’s why.
Why the CCH share price has fallen
Just because it has Coca-Cola in the name, I shouldn’t get confused about the business as a whole. It’s true that NYSE-listed Coca-Cola Co does own over 20% of the shares in CCH. It’s also true that the company is the third largest bottler of Coca-Cola in the world. But it does also support own brands and other third party beverage companies.
However, the impact of Coca-Cola itself is one reason for the falling CCH share price recently. The company has suspended its operations in Russia, having a direct impact on the bottling and selling requirements for CCH.
Not only this, but CCH actually has a plant located in Ukraine, which it has recently had to shut down. This too will impact supply in the short term.
Finally, CCH services most of Europe. Even though Ukraine and Russia accounted for around 20% of 2021 volumes, if the impact of the war moves more into Central Europe then business could be hurt even further.
Why I think the shares are undervalued
I do understand why CCH shares have fallen in the past few weeks. But I ask myself whether a 36% fall is really representative of the facts I’ve just detailed above. There will be a negative financial impact on the business in this fiscal year, but I struggle to see it being substantial enough to warrant such a move downwards.
In the full-year results released in February, the company showed total volumes up 13% from 2020. Net sales revenue was also up 16.9%, helping to boost net profit by 31.9% on the previous year. It’s clear that the business has been doing well overall, and I don’t think the negative impact from Eastern Europe will be enough to materially alter this given the extent of the volume from this area.
In fact, one of the reasons why I like the company is the broad geographical mix of countries that it deals with. This spans three continents, from Nigeria to Italy. This should insulate it from negative issues seen in a few of these at any one time.
I could be wrong here, as noted from the price-to-earnings ratio. Even with the steep fall recently in the CCH share price, the ratio is still 15.72. This is around the FTSE 100 average. So it could be the case that rather than currently being undervalued, the share price used to be overvalued, and the fall has merely brought it back to par.
It’s clearly a high-risk play to consider buying shares in any company with exposure to Eastern Europe at the moment. However, I think that the market has got carried away with the CCH share price. The nature of the goods sold and the diversified geographical selling area leads me to want to buy CCH shares now.
