Two Cuts in Two Days: Why Analysts Have Soured on Coke Stock
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Coca-Cola is more dependent on live events than rival Pepsico, Guggenheim analyst Laurent Grandet writes, and 2021 could continue seeing pandemic lockdowns in the first half.
Justin Sullivan/Getty ImagesCoca-Cola stock was just hit with its second downgrade in as many days. Blame the pandemic.
Guggenheim analyst Laurent Grandet cut his rating on Coca-Cola (KO) stock to Neutral from Buy, and shaved $1 off his price target to $55. The move comes as he takes a broader look at the food-and-beverage sector for the year ahead: He sees “2021 as a year of two distinct halves where the first half will be subject to continued short-term pandemic impacts and pace of the recovery favoring the most battered names, while the second half will be more indicative of the longer term trends into 2022 and beyond.”
Speaking broadly, Grandet expects food companies will come out stronger on the other side of the Covid-19 crisis, while beverage companies will take longer to recover. That’s because people will be slow to return to away-from-home activities, such as dining out or attending crowded events, not reaching pre-pandemic levels until “at least 2023,” in his opinion.
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For Coke specifically, the company gets much more of its business from away-from-home consumption—think bars, movie theaters, live sports—than rival PepsiCo (PEP), on which Grandet reiterated a Buy rating. He estimates that Coke can achieve 5% to 6% organic sales growth post-pandemic, but earnings-per-share growth will be limited to the high-single-digits range, while he’s anticipating low-teens EPS growth from Pepsi.
The move comes a day after RBC Capital Markets downgraded Coke—and Pepsi—arguing that the effects of the pandemic will linger longer than bulls hope, depressing Coke’s recovery.
By contrast, Barron’s argues that Coke is a “must own consumer stock” for 2021. While a slower recovery from Covid does pose a headwind for Coke, we don’t think there’s any reason to worry about the dividend, as some bears do, and are more optimistic about the company’s restructuring efforts and its ability to benefit from a weaker dollar.
Coke stock is down 0.9% to $52.29 in recent trading. The shares have fallen 3.6% in the past 12 months.
Write to Teresa Rivas at teresa.rivas@barrons.com