An analyst at Credit Suisse upgraded Coca-Cola (NYSE:KO) stock to “outperform” from “neutral” on January 9. The stock surged 1.8% on the day. Credit Suisse also revised its price target for the stock to $64 from $54. The new price target indicated about an 18% upside from its closing price on January 8. Analysts have been mostly optimistic about Coca-Cola since its third-quarter earnings release. In October, UBS upgraded KO’s rating to “buy” from “neutral.”
Why Credit Suisse is bullish about Coca-Cola
According to CNBC, Credit Suisse analyst Kaumil Gajrawala upgraded Coca-Cola stock because the company’s structural changes had received a favorable response from its bottlers and other stakeholders. The analyst also sees strength in the leadership of CEO James Quincey, who has been instrumental to the growth of the company’s sparkling beverages business and its business in developed markets. Quincey took over as CEO in May 2017.
The revamped Coke Zero Sugar and other innovations have reignited Coca-Cola’s sparkling beverages business. Coca-Cola is also reaping the benefits of the refranchising of its bottling business. The bottling business’s lower margins and higher capital investments were previously hurting the company’s profitability. Refranchising it helped Coca-Cola focus on its concentrates operations and improve its margins.
Performance so far
Coca-Cola’s net revenue rose 6.4% YoY (year-over-year) to $28.2 billion during the first nine months of 2019. Meanwhile, major rival PepsiCo’s (NYSE:PEP) revenue rose 3.1% YoY to $46.5 billion. Its third-quarter revenue rose 8.3% to $9.51 billion against analysts’ estimate of $9.43 billion. Coca-Cola’s and PepsiCo’s third-quarter adjusted EPS fell 1.8% to $0.56 and 1.9% to $1.56, respectively.
Higher pricing and increased sales in key product categories are fueling Coca-Cola’s top line growth. The company’s sparkling soft drink volumes grew 2% in the third quarter. Trademark Coca-Cola volumes grew 3% boosted by a double-digit rise in Coke Zero Sugar volumes. The beverage giant is also launching innovative products such as Coke Energy and Coke Plus Coffee. Coke Energy has already launched in over 25 markets. The company plans to launch Coke Energy in the US market this year.
Coca-Cola’s focus on non-soda categories helped it drive 1% growth in juice, dairy, and plant-based drinks and 4% growth in tea and coffee volumes. Moreover, volumes of the company’s water, enhanced water, and sports drinks increased by 2% in the third quarter.
Meanwhile, PepsiCo is launching Pepsi Café in April 2020. PepsiCo’s beverage business saw a volume decline of 0.5% in the North American region in the third quarter of 2019. The drop was led by a fall of 3% in its sparkling drink volumes. However, PepsiCo’s still beverages volumes grew 3% in the third quarter.
Will the stock continue to rise?
Coca-Cola stock rose about 17% in 2019, while PepsiCo stock rose 23.7%. Most analysts expect the bullish trend to continue for Coca-Cola stock. Currently, 14 out of 23 analysts have “buy” recommendations on the stock. Meanwhile, the remaining nine have suggested “hold” ratings for it. In comparison, seven out of 21 analysts have rated PepsiCo stock as “buy,” while 13 have suggested “holds,” and one has suggested a “sell.”
Currently, analysts have a target price of $59.24 on Coca-Cola stock. This estimate indicates an upside potential of 6% over the next 12 months. In comparison, the average target price of $139.67 for PepsiCo stock indicates an upside potential of about 4% over the next 12 months.
Both beverage giants are trying to innovate and capture market share in the functional and healthy beverage space. Analysts expect Coca-Cola’s 2019 adjusted EPS to rise 1.2% to $2.11 on revenue growth of 16.4%. They predict a 7.2% rise in its 2020 adjusted EPS. Analysts expect PepsiCo’s 2019 adjusted EPS to fall 2.6% to $5.51 on revenue growth of 3.3%. They expect its adjusted EPS to rise 8.2% in 2020.