Why Credit Suisse Sees Big Upside for Coca-Cola as a Total Beverage Company

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Whenever an influential firm on Wall Street issues an upgrade on a member of the Dow Jones Industrial Average, it is probably hoping for the stock to rise. Credit Suisse’s Laurent Grandet raised the official stock rating of Coca-Cola Co. (NYSE: KO) to Outperform from Neutral.

Grandet raised the earnings estimates, and raised the Coca-Cola target price up to $49 from $44 in the call.
With the refranchising of Coca-Cola nearly complete, the company is now said to have all the pieces in place to be successful again under its new chief executive officer. The company’s new goal seems to be to rebuild Coca-Cola as a total beverage company across multiple categories.

Another boost in the upgrade from Credit Suisse is that Coca-Cola’s key competitive advantages are considered to be the strength and breadth of its global system, its dominance in the on-premise channel that can be leveraged to roll out new brands and categories, and its significant balance sheet flexibility that will allow the company to invest in the business and fill the gaps in the current portfolio.

As far as why investors might be taking at least some pause, the upgrade noted that the higher price target of $49 now assumes a 23-times earnings multiple on its own 2019 earnings per share estimate.

On the refranchising effort, Grandet said:

It was the right thing to do, as it ultimately allows Coke to focus on what it does best: building global brands in a franchise model. It also creates a global network of anchor bottlers that are now more aligned with the recent adoption of the incidence model.

The firm is encouraged about a more open approach to managing the company as an integrated beverages business. It noted that Coca-Cola is now willing to go where the consumer wants with newer and more disruptive offerings. Grandet said:

This growth approach, focusing behind five clearly defined category clusters with the nomination of a chief growth officer and an chief innovation officer, should re-invigorate the entire organization and the global bottling network.

On the optionality to fill portfolio gaps and going after new trends, the report said:

We expect the new growth agenda will unlock revenue streams coming from existing regional winners such as Smartwater, Honest, Innocent, AdeS, and Georgia coffee. We also see a number of strategic M&A opportunities to bolster the portfolio and expand the global platform for future growth, potentially including AriZona, Yoplait, LaCroix, and Monster.

Shares of Coca-Cola were up as high as $43.79 Wednesday morning, but midday trading had Coca-Cola shares down 12 cents (0.29%) at $43.36. Its 52-week range is $39.88 to $46.01, and its consensus analyst target price was $44.16.