Credit Suisse
Coca-Cola Company’s stock price has fallen 7% over the last year as investors have come to realize consumers are becoming increasingly wary of sugary drinks.
But Credit Suisse equity analyst Laurent Grandet says Coke is set to “sparkle” again with new CEO James Quincey taking over May 1 and a promising turnaround plan in place.
Grandet circulated a note to clients April 19 upgrading the stock to an “Outperform” rating from “Neutral” and raising his price target to $ 49 from $ 44.
With carbonated soft drinks struggling, Credit Suisse notes the importance of water and energy drinks to Coca-Cola’s growth:
“In the US, we estimate that total retail non-alcoholic beverages (NAB) business is growing around 3%. The biggest categories such as carbonated soft drinks (CSD) and juice are generally flat to declining, although there are segments within each that are growing (flavored CSD and some refrigerated premium juices). On the other hand, water, energy, and to a lower extend coffee, tea, sports drinks and value-added dairy (VAD) are all growing between mid-single digits and low-double digits.”
Credit Suisse
Credit Suisse expects soft drink sales to decline 1-2% in US and remain flat internationally over the next three years.
Coke is the leader in carbonated soft drinks with roughly 40% of the US market and more than 65% share internationally. However, according to Credit Suisse, “PepsiCo leads in non-carbonated beverages in the US with the number one spot in three of the five segments (Sports at 77%, Tea at 31%, and Coffee at 88%).” Coke is now pivoting to eat into Pepsi’s market share.
Coke’s turnaround plan is based on their new “total beverage company” strategy focusing on five major product areas: carbonated soft drinks, dairy/juice/plant-based, tea/coffee, water, and energy drinks. Credit Suisse says, “In our view, this category approach is a big step in the right direction, and one that its primary competitor PepsiCo took a few years ago with some success in the US.”
Credit Suisse
Coke is in the process of franchising almost all of its bottling operations. The company’s goal is to franchise 97% of all operations, including 100% of North American operations. Credit Suisse says this will lower sales by about 30%, but raise margins and in turn profits by $ 160 million.
Coke is also consolidating those operations to increase coordination and cut costs. Currently the top ten Coke bottlers do two-thirds of all coke bottling.
Grandet concludes that “Coke is on the path to defining its new frontier and we think the company has all the pieces in place to be successful again.”