BMO Capital Markets is favoring growth stories over blue-chip value as BMO analyst Amit Sharma re-rated several companies in the beverage sector.
DPS: Upgraded to Outperform, raised price target to $105
Sharma believes Dr. Pepper Snapple Group Inc. DPS is undervalued and has an attractive growth outlook relative to its competition.
“We are upgrading DPS to Outperform as exaggerated, likely misplaced, concerns about the trajectory and sustainability of Bai Brands’ sales growth has created an attractive entry point, in our view,” Sharma said.
COT: Upgraded to Outperform, raised price target to $17
Improved visibility in the HOD water and coffee business provides Sharma with greater confidence that Cott Corp COT could “reduce exposure to the structurally challenged private label CSD/juice categories in North America.” He also highlighted that Cott’s double-digit free cash flow generation is also attractive to their valuation.
KO/PEP: Downgraded KO and PEP to Market Perform
With very high valuation multiples, and with both PepsiCo, Inc. PEP and The Coca-Cola Co. KO trading near historical highs, Sharma doesn't see much more upside.
Regarding Coca-Cola, he said, "The portfolio transformation outlined by the new CEO James Quincey, which aims to reduce KO’s reliance on CSDs and reorient the portfolio to better align with evolving consumer preferences, is highly desirable; however, it’s unlikely to drive material upside to current sales/EPS estimates for 2017/18, which signal largely flat EPS eight straight years."
Additionally, Sharma said the current M&A scenarios are very attractive for Coca-Cola or Pepsi.
MNST: Reiterated Outperform rating, raised price target to $58
Citing international sales and an increase in margins, Sharma envisions Monster Beverage Rg MNST to continue to excel across earnings metrics.
PRMW: Reiterated Market Perform rating
Despite having a large market share in the bottled-water industry, there isn't much room for a valuation expansion for Primo Water Corporation PRMW.
Overall, Sharma is taking a very contrarian approach as he advises investors to stay away from trading the two largest names in the beverage industry.
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