Goldman Swaps Sell Call On Coca-Cola To PepsiCo On Growth Outlook

In a research note to investors on the beverage space, Goldman Sachs analyst Judy Hong upgraded Coca-Cola (KO) to Neutral and downgraded PepsiCo (PEP) to Sell. While the analyst sees an improving organic sales growth outlook for Coca-Cola, Hong sees potential for continued softer North American Beverage volumes to weigh on PepsiCo’s organic sales growth.

BEVERAGE SPACE: Within the Staples sector, beverage valuations look most elevated, while food stocks appear oversold on consensus estimates, Goldman Sachs’ Hong told investors in a research note. The analyst sees the beverage group’s premium valuation as mostly justified given industry characteristics that are more attractive versus secularly challenged U.S. center store food companies. Beverages have more channel diversification and are less reliant on food grocers, beverage categories tend to have low level of private label penetration and a greater level of market/brand concentration also allows for higher pricing power, she contended. Hong believes all these dynamics should drive higher top-line growth and more insulated margin structure for beverage companies compared to food companies in the U.S. over the next 12 months. Additionally, the analyst pointed out that she sees “a few relevant trends” across the beverage theme playing out thus far in 2018, namely relative convenience store underperformance, comparative alcohol slowdown, and improvement in emerging markets benefiting multinationals, particularly in Latin America.

SWAPPING COCA-COLA, PEPSICO: Goldman Sachs’ Judy Hong upgraded Coca-Cola to Neutral from Sell, while trimming her price target on the shares to $46 from $47. The analyst told investors that she sees an improving organic sales growth outlook, a “cleaner base” post-refranchising, and better visibility on its margin and earnings targets. Hong believes Coca-Cola is “one of the rare” over 4% organic growth mega-cap stories, and now has increased confidence in its organic sales growth outlook. Additionally, Hong noted that she now views fundamentals as warranting a relative premium given Coca-Cola’s positioning as a beneficiary of moderating foreign exchange impact, improving emerging markets growth, and higher margins post-refranchising. Meanwhile, the analyst downgraded PepsiCo to Sell from Neutral and lowered her price target on the shares to $110 from $118, citing the potential for continued softer North American Beverage volumes to weigh on organic sales growth and present modest downside risk to gross margins. While the analyst does not expect Pepsi shares to be “a material absolute underperformer,” she does see scope for it to underperform other beverage names over the next 12 months given muted fundamentals and lack of clear catalysts. Both top-line and margin gains are likely to be harder to come by for PepsiCo’s North America beverage business as multi-year tailwinds to volume are no longer driving growth while c-store underperformance is creating a drag, she contended.