Coca-Cola (KO) Can Unlock Up to $6.1B in Cost Savings Stifel Says in Upgrade

Beverage giant Coca-Cola (NYSE: KO) rose 1.4% Tuesday following an upgrade to Buy from Hold Stifel analyst Mark Swartzberg. The firm also set a $54 price target, suggesting 30% upside to Monday's close.

Swartzberg cited three big underlying themes for his upgrade: valuation, growth and margin.

On valuation, the analyst noted that the stock trades at parity or a discount to peers, in terms of P/E, free cash flow yield, and dividend yield. Meanwhile, forward multiples relative to the XLP are also near three-year lows.

On growth, the analyst highlighted the up-tick in organic growth that they believe can be sustained no matter the underlying macro environment. They also note that management has taken action increasing resolve and ability to drive better performance.

On margin, they highlighted that the improving performance is partly due to reinvestment of a portion of productivity savings announced in October 2014. They see approximately $4.3 billion of additional cost savings, and say potentially as much as $6.1 billion is unlockable. This is the equivalent of an estimated $0.78 - $1.11 in annual EPS, which compares to the current 2017 consensus of $2.22.

"Aided or not by a more demanding board, management is likely to drop more of a given unlock to the bottom line, in our opinion, because spending has been upped and trends are on a better trajectory," Swartzberg said on the margin opportunity.

Looking at catalysts and risk, the analyst highlighted Africa. He said the "run-it-better" thesis receives a big boost or knock, in their opinion, depending upon Coke’s decision regarding bottling assets in Africa.

"ABI's pending purchase of SABMiller positions it as successor to SABMiller in Coca-Cola Beverages Africa (57% economic owner), a role hinging on Coke's use of change-of-control rights," the analyst commented. "We expect Chairman and CEO Muhtar Kent to green-light ABI as a major new bottling partner because it would be consistent with more than a year of actions reducing Coke’s asset intensity, versus a likely alternative of buying SAB’s CCBA stake (worth approximately $4 bn). We expect Coke to state its intent regarding CCBA during 1Q16 or 2Q16."

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