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JPMorgan's Beverage Pair Trade: Buy Keurig Dr Pepper, Sell Molson Coors

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JPMorgan's Beverage Pair Trade: Buy Keurig Dr Pepper, Sell Molson Coors

JPMorgan analysts revised their stance on the beverage sector and presented a new pair trade of assuming a bullish stance on Keurig Dr Pepper Inc (NYSE: KDP) and a bearish stance on Molson Coors Beverage Co (NYSE: TAP).

The Analyst: Andrea Teixeira upgraded Keurig Dr Pepper's stock from Neutral to Outperform with an unchanged $33 price target. The analyst downgraded Molson Coors from Neutral to Underweight with an unchanged $45 price target.

The Keurig Dr Pepper Thesis: Keurig Dr Pepper has seen impressive gains in its single-serve coffee machine and this could translate to long-term growth potential, Teixeira wrote in the note. Management will be in a stronger position to reinvest in the coffee brand and this could fuel longer-term topline growth.

The stock has seen its multiple expand by 200 basis points since the start of March and there is still room to run as investors "continue to gain better appreciation" for a double-digit earnings growth profile. Encouragingly, management has a plan in place to offset some of the inflationary pressures, including upgraded manufacturing facilities and expense savings from debt paydown.

Related Link: Keurig Dr. Pepper CEO On Coffee And Beverage Trends: 2020 Growth Part Of Longer-Term Momentum

The Molson Coors Thesis: Teixeira said Molson Coors' timeline to recovery is "highly uncertain" amid cold weather in Texas, new lockdowns in Europe, the company's disclosure of a cybersecurity attack that impacted its order fulfillment, and requirements for management to reinvest in marketing to stimulus above-average growth.

Management deserves credit for its success in seltzer and other high-growth categories but at the same time, Molson's exposure to the category accounts for approximately 10% of US sales.

"As such, given the headwinds in its core business, we see risk to the company's ability to meet its FY2020 financial guidance of mid-single-digits top-line growth and flat EBITDA growth," the analyst wrote.

KDP, TAP Price Action: Shares of Keurig Dr Pepper hit a new 52-week high of $34.58 Friday morning and were trading higher by 1.2% at publication time.

Shares of Molson Coors were lower by 1% at $48.65.

 

Related Articles (TAP + KDP)

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