Morgan Stanley Upgrades Coca-Cola (KO) to Overweight; Investors Should Price in Improving Fundamentals, Says Analyst

(Updated - January 5, 2015 10:11 AM EST)

Morgan Stanley upgraded Coca-Cola (NYSE: KO) from Equalweight to Overweight with a price target of $47. Analyst Dara Mohsenian think strategic changed will drive improved fundamentals and multiple expansion over the next 12 months.

"We expect investors will start to price in improving fundamentals with: 1) rebounding topline growth (4% in 2015/2016e vs. 2.75% adj. in 2014e) on higher Coke pricing and KO market share gains due to higher marketing, 2) as Coke returns to its HSD LT underlying EPS growth target in 2016 with greater cost-cutting and rebounding topline growth, and 3) Coke’s NA refranchising drives higher returns/margins," said Mohsenian.

"Most important, we expect Coke's topline growth to rebound to the 4% organic sales growth range from ~2.75% in 2014e as greater pricing is implemented (with only a partial volume demand offset) and with a KO market share payback from higher marketing. Both of these factors are already playing out in improving Coke US scanner data (+2% KO H2 US CSD sales growth vs. a flat H1 result and a -2% decline in 2013), increasing our confidence at the corporate level," continued the analyst.

"Second, we believe incremental cost-cutting, combined with a topline reacceleration, will allow Coke to return to HSD LT EPS growth targets (ex FX/bottling dilution) in 2016 post already guided to misses in 2014/2015e. We also now believe ex FX, consensus EPS estimates are roughly in the right place (we are ~1% below adjusted/ex-stale consensus estimates at Coke in 2016 but this is actually less than other mega-cap names as consensus does not fully reflect current FX rates across the CPG group)," he added. "In addition, we believe Coke's NA refranchising will drive shareholder value going forward, as the bad news is already out (EPS dilution has been guided to), with the pending higher returns/margins (good news) slated to play out going forward."

For an analyst ratings summary and ratings history on Coca-Cola click here. For more ratings news on Coca-Cola click here.

Shares of Coca-Cola closed at $42.14 yesterday.

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