Morgan Stanley analysts have raised Coca-Cola to their top pick in the beverage sector, replacing PepsiCo. The investment bank also raised its price target. Coca-Cola Company (NYSE:) shares from $70 to $78, representing a gain of about 10% from recent levels.
“We continue to favor Coca-Cola here in absolute terms and even more relative to a group suffering from slowing organic sales growth, as Coca-Cola’s fundamentals increasingly decouple from the group,” analysts said in a note.
They point out that stock selection within the beverage sector has been difficult, with alpha made harder to find by the split between stocks with higher relative valuations — those with strong upside but limited upside after recent gains — and those with lower valuations but facing fundamental pressures.
According to Morgan Stanley, Coca-Cola stands out as a unique “balanced” option. Analysts believe Coca-Cola is well positioned to deliver strong, above-consensus performance and above-peers long-term performance in what they call a “top-line decline” scenario for the industry, with weaker industry pricing trends.
Additionally, they point out that Coca-Cola offers an attractive valuation, “trading broadly in line with relative discounts to long-term averages versus its large-cap peers despite improving fundamentals.”
Wall Street has identified four key advantages that support its overweight rating for Coca-Cola compared to its peers.
They point to Coca-Cola’s healthy sales growth, which is critical in the face of unsustainable pricing trends in the industry. This, coupled with Coca-Cola’s strong pricing power, reinforces confidence that the company will sustain higher organic sales growth than its competitors over the long term.
Furthermore, Coca-Cola is benefiting from strong international trends, particularly in emerging markets, where growth is outpacing North America. The company’s enduring pricing power and market share gains are expected to become increasingly important as the broader industry’s pricing tailwinds abate.