Why This Notable Analyst Downgraded Shares Of Coca-Cola, Left Pepsi Shares At Neutral

Ivan Feinseth of Tigress Financial Partners turned incrementally bearish on soft drink makers. On Friday, the analyst downgraded shares of Coca-Cola to Neutral from Buy while maintaining a Neutral rating on shares of PepsiCo.

According to Feinseth, there are "few catalysts" on the horizon for Coca-Cola and the company's headwinds from a stronger dollar and slow down of international growth will "keep the pressure" on the company's "now stagnating performance metrics." Feinseth continued that he expects Coca-Cola's revenue to decline over the next year – marking the fourth consecutive year of negative growth. The analyst is estimating sales will decline over the next year from $44.63 to $44.51 billion. On the other hand, the analyst expects the company's EBITDAR and NOPAT margin to improve due to the company's expansion of its productivity program. However, Feinseth cautioned that Coca-Cola's EBITDAR and NOPAT improvements will not boost other metrics. The analyst suggested that the company's return on capital will erode from a current 9.23 percent to 9.10 percent while its economic profit will decline 1.4 percent from its current $3.31 billion to $3.26 billion. Bottom line, while Coca-Cola's investments in Monster Energy, Keurig, and other "high-growth beverage segments" are "appropriate" it is "not enough to overcome a challenging macro environment."

Commenting on Pepsi's outlook, Feinseth noted that while Pepsi has a "slightly less" international exposure compared to Coca-Cola, the company nevertheless faces similar headwinds. Feinseth continued that he sees "few opportunities" for Pepsi to improve its own financial performance metrics. In fact, Pepsi's better than expected operating margin during the third quarter does not indicate a "sustainable trend" and the company's EBITDA margin will remain flat over the next few years. Feinseth added that similar to Coca-Cola, Pepsi's return on capital will decline from its current 10.47 percent to 10.18 percent over the next 12 months. This will add "pressure" to its economic profit which is also expected to decline by 2.79 percent to $3.54 billion. Finally, the analyst pointed out that Pepsi demonstrated an organic revenue growth of 7.4 percent during the third quarter and this was "wiped out" by a 12 percent point impact due to unfavorable foreign exchange rates. As such, this marks "the most significant impediment" to Pepsi's ability to drive profit higher.