I love infrastructure.  It’s one thing to buy a business and its stock.  If you can buy companies that provide the infrastructure for that business to succeed, however, you have an even better business.

Is there an infrastructure play when it comes to soda?  Actually, there is.  You know all about Coca-Cola (NYSE:KO).  But Coke is more than just soda.  Coke is also about bottles and cans, and an entity went public in 1986 to focus on just that aspect of Coke’s business.  It has the unlikely name of Coca-Cola Enterprises (NYSE:CCE).

Back in 2010, Coca-Cola Enterprises sold back all of its North American operations to its parent company and focuses exclusively overseas.  In fact, it purchased bottling operations in Scandinavia for $872 million that same year.


Specially, as of 2013, the company officially markets and distributes non-alcoholic beverages.  The market consists of 170 million people in Western Europe and Scandinavia.  And boy, did these people consumer soda – to the tune of 12 billion bottles and cans every year.

As Coke’s sister company, they are able to leverage their mutual size and market command and work together to purchase all the things both businesses need.  This means they’ll share costs on marketing, advertising, purchase of sweeteners and other finished products, work on where to place their vending machines and even purchase other bottling companies.

It isn’t just Coke they sell, by the way.  There are dozens of brands, including Schweppes, Dr. Pepper, Oasis, Monster, WILD, Capri Sun, Ocean Spray, and other European brands.

The bottling operation generates a very impressive operating margin of 13% and net margins of 8.7%. And just as Coke enjoys modest revenue growth worldwide, so does its bottler.  Sales are increasing at 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, and does so on an incredibly consistent basis.

FY11, 12, and 13 saw operating cash flows of $862MM, $947MM, and $833MM, respectively.  Capex in those years were $376MM, $378MM, and $313MM, respectively, yielding free cash flow of $486MM, $569MM, and $520MM, respectively.  It’s expected to hit $650MM this year.

CCE has been constantly increasing its dividend, as well, and it is up 60% since FY11.  Despite this 2.2% yield, the total dividend outlay is still only $250MM per year, or half of free cash flow.  There’s room for plenty more increases.

Meanwhile, the company sits on a $356 million stack of cash with $4 billion in debt that costs less than 3% annually. Financially, it’s as solid as any company can be.

It’s one thing to look at Coke at 21x earnings, with EPS growth of 5%, and pony up the money to buy a premium stock.  It’s another to look at CCE at 15.5x estimates, with annualized growth at 11.5% and a 2.2% 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.

It also flies under the radar.  When you look at company headlines, you see tons of them for Coke, but barely any for CCE.  I prefer going with the underfollowed selection, because eventually the market will catch on and perhaps bid the price up.

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

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