The Coca-Cola HBC share price looks like a bargain to me

Edward Sheldon believes the Coca-Cola HBC share price has the potential to rise significantly in the medium term.

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The Coca-Cola HBC (LSE: CCH) share price shot up today (14 February). As I write, it’s up almost 6%.

I think the stock has the potential to climb higher however. In my view, it’s still in bargain territory.

Strong full-year results

Full-year FY2023 results from the Coca-Cola bottler this morning were impressive. For the year, net revenue was up a healthy 16.9% year on year to €10.2bn – the third consecutive year of double-digit growth – thanks to strong demand for the company’s products.

Meanwhile, earnings per share were up 21.8% to €2.08.

On the back of this excellent performance, the board proposed an ordinary dividend of €0.93 per share (a yield of about 3.4% today), up a whopping 19.2% year on year.

This payout is on top of a €400m share buyback programme launched in November.

2023 was another year of consistent execution of our growth strategy. We delivered volume growth, share gains, improved margins, and record levels of free cash flow. As a result, we were able to increase shareholder returns, including the launch of a share buyback programme.

Coca-Cola HBC AG CEO Zoran Bogdanovic

Looking ahead, the company said it expects the macro and geopolitical environment to remain challenging. However, it’s confident it can continue to grow. For 2024, it expects organic revenue growth of 6-7%. That’s a decent level of top-line expansion.

A cheap stock

Currently, analysts expect the beverages company to generate earnings per share of €2.09 (£1.79) for 2024. That puts its price-to-earnings (P/E) ratio at about 13.

That strikes me as a low valuation, especially when the group’s big brother, Coca-Cola Co, has a P/E ratio of 21. I wouldn’t expect the two companies to have the same valuation. That’s because Coca-Cola Co is a little more profitable.

But I think the valuation gap is too wide. I reckon Coca-Cola HBC shares could easily trade at a P/E ratio of 15. That would equate to a share price of around 2,700p.

One other metric that suggests the stock is cheap right now is the free cash flow yield (a ratio that a lot of professional investors love).

For 2023, Coca-Cola HBC delivered record free cash flow of €712m (£609m). Given that the company has a market-cap of £8.5bn, that puts the free cash flow yield at about 7%. That’s really attractive and indicates the group is generating a ton of cash for its investors.

Of course, there’s no guarantee the stock will continue to rise from here. Like a lot of companies, it’s vulnerable to economic and geopolitical weakness.

However, the near-20% increase in the dividend payout suggests that management is confident about the future.

And with a vast portfolio of products that includes soft drinks, juices, alcoholic beverages, coffee products, and exercise drinks, I think it’s well positioned to keep growing.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has positions in Coca-Cola. 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.

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