Wait! Don't Throw This Stock Away!

With Europe having possibly killed the global economic recovery, it's suddenly become much tougher to find companies that offer the prospect of improving fundamentals during the next 12 to 18 months. Tougher, but not impossible: Bottling behemoth Coca-Cola Enterprises (NYSE: CCE  ) , a behind-the-scenes industry player, may be one place to look.

When I last mentioned CCE, it was in the context of Coca-Cola's (NYSE: KO  ) pending purchase of the bottler's North American assets. At the time, my sights were fixed on what the transaction meant for Coca-Cola's waning U.S. soda business. Yet the greater upside may lie with the resulting transformation of Coca-Cola Enterprises.

A glass half-full
First, some background. In its current form, CCE is the world's largest nonalcoholic ready-to-drink bottler. Largest, but not the most profitable. The Coca-Cola bottling arm of Latin America-based FEMSA (NYSE: FMX  ) , for one, boasts a far superior operating margin. But for CCE, profitability -- and top-line growth prospects -- are set to rise.

Once CCE sells its underperforming North American operations to Coca-Cola -- the transaction is scheduled to close in the fourth quarter -- it will emerge as an exclusively Western Europe-focused business. That, my friends, is a development that's bubbling over with positives.

Let's begin with historical trends. From 1998 to 2008, the company's compound annual volume growth in Great Britain and France -- its two largest European markets -- registered 4.9% and 3.1%, respectively. Meanwhile, the U.S. and Canada were flatter than a week-old soda. In particular, the "new" CCE's carbonated-beverage category is poised for an upturn. And thanks to low relative per capita consumption in key European markets, CCE looks to have plenty of runway.

Now, I know that any mention of Europe these days is likely to send investors reeling. Fortunately, CCE doesn't do business in the most troubled countries, the PIIGS (Portugal, Ireland, Italy, Greece, and Spain), where consumer pressures are likely to be the worst. In related industries, shareholders of booze king Diageo (NYSE: DEO  ) and Big Tobacco player Philip Morris International (NYSE: PM  ) can't claim the same immunity. Nor does CCE have exposure to Eastern Europe, where regional macroeconomic challenges have dampened sales for the likes of snacks-and-beverage giant PepsiCo (NYSE: PEP  ) .

Granted, there's the issue of a falling euro, which weighs on dollar-denominated results. Furthermore, over the long term, European consumers may demonstrate a lower ceiling when it comes to per-capita consumption, meaning that markets may never become as robust on an absolute basis as those in the U.S. are. Even so, for the next several years if not longer, the new CCE looks like a leaner, meaner bottling machine. And the financials lend credence to that view.

Future profits: A bigger swig
Earlier in the year and before the announcement of the asset sale, CCE management affirmed its long-term targets of 4%-5% revenue growth, 5%-6% operating income growth, and high single-digit earnings-per-share gains. Now, however, CCE sees future performance exceeding those marks.

At the end of February, CCE's shares jumped on the asset-sale news. Yet at a forward price-to-earnings ratio of 13.2, investors probably still have time to drink from the value tap.

Coca-Cola is a Motley Fool Inside Value pick. FEMSA and Philip Morris International are Global Gains recommendations. Diageo, Coca-Cola, and PepsiCo are Income Investor picks. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Coca-Cola. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Mike Pienciak holds no financial interest in any company mentioned in this article. The Fool has a disclosure policy.


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