The Other Coke (No, It’s Not Pepsi)

You have to be living under a 7-Eleven not to know about Coca-Cola (NYSE:KO). It’s certainly one of my Forever Hold stocks. What most investors may not know, however, is that Coke’s operations were always more than just the fizzy stuff. All that soda had to end up in bottles and cans, and an entity went public in 1986 to focus on that. The name of that entity was Coca-Cola Enterprises (NYSE:CCE).

Recently, Coca-Cola Enterprises turned around and sold back all of its North American operations to its parent company. So now it represents bottling interests solely in Europe.

Many times you can find a great investment by looking at the infrastructure of an already successful company and investing in those elements. I think that’s the case here. As you might expect, there is more overhead associated with bottling than with making beverages.  Nevertheless, the bottling operation generates a very impressive gross margin of 30% and net margins of 9%. And just as Coke enjoys modest revenue growth worldwide, so does its bottler.  Sales are increasing at 5.5% annually, driven by both volume and price increases.

A company that is so entrenched in its business and connected to a global brand name should be expected to create very solid free cash flow. Coca-Cola Enterprises does just that. Some $862 million was generated in 2011, and the company wisely diversified how it deployed that capital by allocating some to dividends, share buybacks, and capital expenditures. CCE also launched a new billion-dollar buyback plan and is aiming to use half of it in 2012 alone. Meanwhile, the company sits on a $685 million stack of cash. Financially, it’s as solid as any company can be.

It’s one thing to look at Coke at 17x earnings and pony up the money to buy a premium stock.  It’s another to look at CCE at 12.5x estimates, with annualized growth at 10.5% and a 2.3% yield, and see a stock that’s fairly priced without a huge premium. I think the company makes for an interesting purchase — and possibly even an alternative to its pricier cousin.

Lawrence Meyers does not own shares of any company mentioned here.

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