Market Overview

Morgan Stanley's Beverage Pair Trade: Overweight Coca-Cola, Underweight Keurig Dr Pepper

Share:
Morgan Stanley's Beverage Pair Trade: Overweight Coca-Cola, Underweight Keurig Dr Pepper

Beverage companies The Coca-Cola Co (NYSE: KO) and Keurig Dr Pepper Inc (NYSE: KDP) trade at similar valuations, but one of the names boasts a higher growth rate and one comes with much higher risk, according to Morgan Stanley.

The Analyst

Dara Mohsenian maintained an Overweight rating on Coca-Cola with an unchanged $55 price target.

The analyst maintained an Underweight on Keurig Dr Pepper's stock with an unchanged $24 price target.

The Thesis

Coca-Cola's stock trades at 15.9 times on an EV/EBITDA basis, which is comparable to Keurig's multiple of 15.1 times, Mohsenian said in a Tuesday note. (See his track record here.)

Keurig's stock trades at 24.2 times 2021 free cash flow estimates versus Coca-Cola's multiple of 22.1 times. Since these two metrics are "most appropriate" to form an investment thesis, the case for a pair trade can be made, the analyst said. 

Coca-Cola's long-term EBITDA growth outlook stands at 7 percent, which is more than double the 3-percent growth expected at Keurig, he said, adding that Coca-Cola also boasts a superior net debt/EBITDA ratio of 2.5 times versus Keurig at 5.1 times.

Aside from financial metrics, Coca-Cola has more favorable geographic and category exposure with a superior pricing power and distribution network, Mohsenian said. Coca-Cola also has a stronger portfolio of non-carbonated drinks, he said. 

On the other side of the trade, Keurig's recent tie-up with Dr Pepper adds a layer of integration risk on top of the historical volatile performance at Keurig Green Mountain, the analyst said. 

Coca-Cola is in a better position to adapt to consumer preferences for healthier options, Mohsenian said. 

Coca-Cola's most recent Costa acquisition and stake in Body Armor signal that the company is shifting to become a "total beverage company," the analyst said.

On the other hand, Keurig's debt leverage could limit its ability to diversify its business, in which the legacy Dr Pepper Snapple business (60 percent of total sales) is largely exposed to carbonated sugar drinks, according to Morgan Stanley. 

Price Action

Coca-Cola shares were down by 0.27 percent late in Tuesday's session, while Keurig Dr Pepper shares were down 0.6 percent. 

Related Links:

Carter Worth And Mike Khouw's Coca-Cola Trade

Keurig Losing Buzz, Morgan Stanley Says In Downgrade

Latest Ratings for KDP

DateFirmActionFromTo
Aug 2020Morgan StanleyUpgradesEqual-WeightOverweight
Jul 2020Morgan StanleyMaintainsEqual-Weight
Jul 2020JefferiesMaintainsBuy

View More Analyst Ratings for KDP
View the Latest Analyst Ratings

 

Related Articles (KO + KDP)

View Comments and Join the Discussion!

Posted-In: beveragesAnalyst Color Long Ideas Short Ideas Price Target Reiteration Analyst Ratings Trading Ideas Best of Benzinga

Latest Ratings

StockFirmActionPT
CAMTStifelInitiates Coverage On19.0
ELMDNorthland Capital MarketsInitiates Coverage On15.0
DKNGUBSInitiates Coverage On52.0
DIODTruist SecuritiesInitiates Coverage On84.0
TGTArgus ResearchUpgrades205.0
View the Latest Analytics Ratings
Don't Miss Any Updates!
News Directly in Your Inbox
Subscribe to:
Benzinga Premarket Activity
Get pre-market outlook, mid-day update and after-market roundup emails in your inbox.
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Fintech Focus
A daily collection of all things fintech, interesting developments and market updates.
Thank You

Thank you for subscribing! If you have any questions feel free to call us at 1-877-440-ZING or email us at vipaccounts@benzinga.com