UBS Upgrades Coca-Cola (KO) to Buy; Sees $45-$50 as New Trading Range

(Updated - July 14, 2015 9:01 AM EDT)

UBS upgraded Coca-Cola (NYSE: KO) from Neutral to Buy with a price target of $48 (from $44), saying the stock is finally poised to break out. Analyst Stephen Powers sees $45-$50 as KO's future trading range and said risk-reward is discernibly positive.

Powers commented, "Since 2012, KO has traded within a $37-$44 band. Today, we upgrade KO to Buy ($48 PT), given increasing probability that KO will break out over the next 12 months. Our optimism is driven by a thesis that: 1) Pricing/productivity have taken firm root in KO's culture, 2) Optionality exists on future structural changes within the Coca-Cola System (refranchising, profit pool shifts), 3) KO volumes/EPS should find relief if macros ease (i.e., if GDP deceleration/USD strengthening bottom or reverse)."

He added, "While new estimates are broadly in line with consensus, we see multiple paths to upside; also, if EPS quality improves (as forecasted) or refranchising results in higher ROIC, KO should benefit from multiple expansion (vs. the market, KO now trades at only its 30th percentile vs. history)."

Powers said KO is doing the right things and they look for more. "Last August, we outlined a series of 10 initiatives that we thought KO needed to better prioritize in order to improve the company's prospects," the analyst commented. "While work continues (and should), KO has made great strides over the last 10 months—elevating productivity, focusing on price realization, and ingraining such values in shifting incentives. Looking ahead, we believe KO could raise its $3B cost-cutting target to $4B+, and another ~$1B could add ~9% to FY17 EBIT ($0.19 to EPS, or $4 to KO's share price at 21x), if fully passed through."

The firm also said structural set-up inside Global Coca-Cola System (GCCS) equals added optionality.

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 $40.66 yesterday.

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