Coca-Cola Stock: Why UBS Is So Upbeat

The Coca-Cola Company (KO) stock rose 1.5% on October 23 following a rating upgrade by UBS. According to CNBC, UBS upgraded its rating for the stock to “buy” from “neutral.” UBS raised its price target for the stock to $63 from $55. It’s bullish about Coca-Cola because it expects the company to deliver higher earnings and cash flow over the next three years.

UBS believes that the increase in prices of Coca-Cola’s products in the US, the company’s Costa acquisition, its refranchising efforts, and its strong innovations will drive its growth. The stock has risen 15.4% year-to-date as of October 23. However, the stock lags the 24.4% rise in PepsiCo (PEP) stock. Meanwhile, the S&P 500 and Dow Jones have risen 19.9% and 15.0%, respectively, so far this year.

Coca-Cola stock rose after its third-quarter results

Coca-Cola reported mixed third-quarter results on October 18. The company’s third-quarter revenue rose 8.3% to $9.51 billion. It surpassed analysts’ forecast of $9.43 billion. Excluding structural items and currency fluctuations, Coca-Cola’s revenue rose 5% on an organic basis. Favorable pricing and mix drove its top line growth. Coca-Cola stock rose 1.8% on October 18, as investors were impressed by the momentum in the company’s revenue.

However, the company’s adjusted EPS fell about 2.0% to $0.56. Nonetheless, its earnings were in line with analysts’ expectations. Currency headwinds impacted Coca-Cola’s bottom line. Coca-Cola now expects organic revenue growth of at least 5% in 2019. It expects its 2019 adjusted EPS growth to be in the range of -1.0%–1.0%.

In comparison, PepsiCo’s third-quarter revenue rose 4.3%, while its adjusted EPS fell 1.9%. PepsiCo foresees organic revenue growth of at least 4% in 2019. It expects a 3% fall in its 2019 EPS.

Volume growth across categories

Coca-Cola’s strategic initiatives and continued innovations drove volume growth across its sparkling and still beverages in the third quarter. Overall, the company’s unit case volumes grew 2% in the third quarter. Sparkling soft drink volumes rose 2%, with a 3% rise seen in the trademark Coca-Cola line. Coca-Cola Zero Sugar volumes continued to grow in the double-digits in the quarter. Also, demand for smaller packages with lower sugar levels has been further driving sparkling beverage volumes.

In the third quarter, Coca-Cola’s juice, dairy, and plant-based beverage volumes increased 1%. Plus, water, enhanced water, and sports drink volumes increased 2%, and tea and coffee volumes increased 4%. Coca-Cola continues to launch innovative products based on evolving consumer tastes. It launched Coca-Cola Plus Coffee in over 20 markets. Earlier this year, the company introduced Coca-Cola Energy in Spain and Hungary. The new energy drink is now available in over 25 countries. The company plans to launch Coca-Cola Energy in the US market next year.

Coca-Cola stock: Is there more upside?

Coca-Cola stock is currently rated a “buy” by 14 out of 25 analysts, while 11 call it a “hold.” Following KO’s third-quarter earnings results, BMO raised its price target for the stock to $55 from $52. Guggenheim increased its price target to $59 from $58. Cowen and Company also revised its price target to $60 from $56. On October 23, KO had an average 12-month price target of $58.35. This estimate implies a potential upside of about 7%.

Currently, analysts expect PepsiCo stock to rise 1.6% to $139.65 over the next 12 months. PepsiCo has “buy” recommendations from nine analysts and “holds” from 13 analysts. One analyst has a “sell” rating on PepsiCo.

Both Coca-Cola and PepsiCo are trying to capture demand for healthier and better beverage choices. Currently, analysts expect Coca-Cola’s revenue to rise 16.4% and 4.0% in 2019 and 2020, respectively. They expect its adjusted EPS to rise 1.4% and 7.1%, respectively, in 2019 and 2020. Analysts expect PepsiCo’s revenue to rise 3.3% in the current year and 4.2% in 2020. PepsiCo’s adjusted EPS are expected to fall 2.5% in 2019 and rise 8.2% in 2020.