As part of his initiation of the U.S. Beverages sector, UBS analyst Sean King started Molson Coors (TAP) and Keurig Dr Pepper (KDP) with Buy ratings as he believes they have a track record of execution and trade at meaningful growth-adjusted discounts, and initiated Monster Beverage (MNST), National Beverage (FIZZ) and Boston Beer (SAM) with Sell ratings on valuation and meaningful growth deceleration in the near-term. Additionally, the analyst downgraded Coca-Cola (KO) to Neutral as aggressive price increases set-in domestically and a new CFO takes the helm.
BUY RATINGS: UBS’ King started coverage of Molson Coors with a Buy rating and $80 price target. The analyst noted that Molson Coors is the cheapest name in Beverages, trading at a 40% discount to the group, and recommended the stock ahead of a volume-driven sentiment inflection enjoyed by other Consumer Staple stocks. Further, King believes Molson Coors can return to 70bps-plus of positive volume growth by 2019 given current category momentum, investments, and active portfolio adjustments by management. King also initiated Keurig Dr Pepper with a Buy rating and $32 price target. He recommended buying shares for 20%-plus stock upside ahead of a strong holiday setup, $35M-$85M in synergy over-delivery, and a current price that is discounting 0% terminal growth in the outer years. Over the long term, the analyst told investors that he believes the continued brewer product cycle, a relationship to JAB's global coffee assets, and Dr Pepper's superior elasticity will support mid-single digit growth beyond deal integration.
SELL RATINGS: Bearish on three other stocks in the space, UBS’ King initiated coverage of Monster Beverage, National Beverage and Boston Beer with Sell ratings. The analyst told investors that he expects Monster's sales to fall 3% below the Street view in FY19 and 6% below in FY20. Topline weakness coupled with structural margin mix headwinds drive his 5%/8% EPS misses in FY19/FY20, respectively, he added. Further, King argued that while recent pricing dynamic creates a favorable event path to close the year, it sets up FY19 for deceleration and subsequent multiple contraction. Monster’s global sales growth will slow despite favorable elasticity as categories and markets mature and fleeting tailwinds subside, King contended. Regarding National Beverage, the analyst sees it as a growth story in the process of unravelling while its scarcity value as a strategic asset comes into question with each deal/partnership announcement. Total company growth slowed and he forecasts it will continue to decelerate before stabilizing at 3% in 2024. Lastly, King told investors that he also expects Boston Beer's multiple to contract as sales decelerate and operating margins fall 50 bps below the Street. The analyst noted that he expects the material slowdown in tracked channels to come from the rise of competition chasing recent successes in Hard Seltzer and Tea. Boston Beer's successes will likely prove transitory and replicable by large competitors who can operate at lower cost and leverage superior clout with distributors, he added.
MOVING TO THE SIDELINES ON COCA-COLA: In a separate research note, UBS’ King assumed Coca-Cola with a Neutral, down from the firm's prior Buy rating, with a $51 price target. While the analyst acknowledged that Coca-Cola is a stock for stable earnings growth to ride out defensive times, he argued that “change is in the air” as aggressive price increases set-in domestically, the company pursues a transformational non-core deal, global refranchising nears completion and a new CFO takes the helm. King sees modest risk that any one of moving parts could allow management to back away from long-held global growth targets. Coca-Cola’s valuation is back above its historical premium to the group on both PE and EV/EBITDA, which reflects improved operating metrics following refranchising as well as the start of a defensive rotation, he added. Additionally, the analyst initiated coverage of PepsiCo (PEP), Constellation Brands (STZ), Coca-Cola European Partners (CCE), and Brown-Forman (BFA; BFB; BFB.A; BFB.B) with Neutral ratings.
PRICE ACTION: In afternoon trading, shares of Coca-Cola and PepsiCo have gained about 1%, while Monster’s stock has dropped almost 7% and National Beverage has slipped 5%. Also lower, shares of Boston Beer have slid almost 2%. Meanwhile, Molson Coors and Keurig Dr Pepper are fractionally higher.
Coca-Cola
+0.27 (+0.55%)
Keurig Dr Pepper
+0.03 (+0.11%)
Molson Coors
+0.2 (+0.32%)
Monster Beverage
-3.93 (-6.84%)
Boston Beer
-4.34 (-1.58%)
National Beverage
-4.15 (-4.93%)
PepsiCo
+1.33 (+1.14%)
Constellation Brands
-3.67 (-1.97%)
Symbol CCEP
+ (+0.00%)
Brown-Forman, also tag with BF.A, BF.B
+ (+0.00%)
Brown-Forman, also tag with BF.A, BF.B
+ (+0.00%)
Brown-Forman
+1.41 (+3.03%)
Brown-Forman
+0.95 (+2.04%)