Shares of Coca-Cola (KO) moved higher in morning trading after a Morgan Stanley analyst upgraded the stock to Overweight, saying the company's growth prospects are not reflected in the current valuation.
COCA-COLA TRADING AT 'UNFAIR DISCOUNT' TO PEERS: Morgan Stanley analyst Dara Mohsenian upgraded Coca-Cola to Overweight from Equal Weight and raised his price target for the shares to $55 from $52. Coca-Cola is trading at a very attractive valuation based on its history and relative to likely better-than-expected earnings in the coming years, Mohsenian told investors in a research note.
"Coke is now our top mega-cap staples pick," Mohsenian wrote, adding that "We believe KO offers a clearly superior growth outlook vs. [consumer packaged goods] peers, with stronger pricing power, favorable strategy tweaks, solid volume growth, and rebounding emerging market trends, which are not reflected in relative valuation below historical long-term averages."
Coca-Cola's valuation discount vs. its peers is "unfair" as it offers structurally higher sales growth compared to peers, added the analyst. "Surprisingly, despite clear historical proof, this is not being recognized in valuation at what we see as an unfair discount to peers," stated the analyst.
The analyst expects continued outperformance, with 5% long-term Coca-Cola topline growth vs. 3.5% growth at mega-cap peers. Mohsenian attributed the company's below-consensus 2019 guidance to currency and feels it should have a minimal impact on Coca-Cola's valuation. Looking ahead, he thinks earnings per share growth will inflect going forward, with "robust" topline growth and as pressure from foreign exchange dissipates. While Coca-Cole did not grow EPS in 2013-2018 with "pronounced" FX pressure and EPS dilutive bottling divestitures, and has guided to a flat 2019, the analyst sees EPS growth inflecting to positive high single digits in 2020 and beyond.
ARGUS SEEKING 'FAVORABLE ENTRY POINT': Meanwhile, Argus analyst Chris Graja kept his Hold rating on Coca-Cola, but said he is he is looking for a "favorable entry point" on the stock and would "strongly consider" an upgrade to his rating at a price of $40-$42 per share. The analyst said in a research note of his own that he sees the company as "reasonably valued" based on his projected 8% earnings growth rate as well as his view of Coca-Cola's financial strength and ability to deploy cash.
RECENT GUIDANCE: Last month, Coca-Cola backed its FY19 continuing operations EPS growth view of down 1% to up 1% year-over-year. Its guidance also includes approximately 4% growth in organic revenues, as well as 12%-13% growth in comparable currency neutral net revenues, including an 8% to 9% tailwind from acquisitions, divestitures and structural items. At the time, Chief Executive Officer James Quincey said that "We remain confident in our full year guidance as we continue to make progress on our transformation as a consumer-centric total beverage company." Management also noted that the macro environment is "similar to what we have been planning against." Currently, the Street consensus for FY19 EPS is $2.10 on revenue of $34.67B.
To accelerate its growth, Coca-Cola is making a big push into coffee. The company plans to launch Coca-Cola Coffee, which blends Coke soda with coffee and has slightly less caffeine than a cup of coffee but more than a can of soda, in 25 markets by the end of the year. The move comes as consumers have shifted from drinking soda to choosing less sugary options, like bottled water and Coca-Cola Zero Sugar.
PRICE ACTION: In morning trading, shares of Coca-Cola are up up 2.3% to $49.16.
Keywords: analyst, analyst commentary, Street research, upgrades, CPG, consumer packaging