RBC Capital Markets was the first firm to downgrade Coca-Cola in January, in what would become a very bearish start to the new year for the beverage giant. Yet today it sees reason to be more optimistic about the stock.
Analyst Nik Modi upgraded Coca-Cola (ticker: KO) to Outperform from Sector Perform on Monday, and raised his price target on the stock to $60 from $55. The move comes after Coke shares have languished—falling more than 7% in 2021—and his belief that with the Covid-19 situation somewhat stabilizing in the U.S. and abroad, the company is poised to benefit from consumers’ increased mobility.
Coke was up 0.6%, to $51.09 in premarket trading Monday.
The approach of spring in much of the U.S. will do a lot to get consumers back into restaurants, he says, along with other trends.
“Looking out over the next few months, we are expecting a material increase in consumer mobility driven by a combination of better weather, re-openings, stay-at-home fatigue, fairly efficient vaccine distribution, and overall better knowledge on protection against the virus,” he wrote. Given that Coca-Cola gets about half its business from away-from-home consumption, the analyst argues that “a stark improvement in consumer mobility will be the catalyst Coke shares need to start moving higher.”
Yet Coke isn’t just a recovery play. Modi points to the company’s organizational restructuring, announced last fall, and likens it to Procter & Gamble’s (PG) successful 2018 reorganization. He argues that the move can start to bear fruit as soon as the third quarter, and allow Coke to hit its stride in 2022.
There is still some concern about the potential tax burden that Coke might face, stemming from a U.S. Tax Court’s ruling in November. Yet he argues that Coke’s consultants believe that the tax court has misinterpreted the law, and even if a worse-case scenario were to come to pass, there wouldn’t be any risk to the dividend, given Coke’s balance sheet. Moreover, he points to the tobacco industry’s protracted fights, noting that “this type of litigation will take time (could be over a year until resolution) and investors are quick to look past overhangs if fundamentals are improve (which is the case with KO).”
Nor is he the only analyst who thinks that Coke’s tax situation may not be as dire as bears think.
Write to Teresa Rivas at [email protected]
