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The rally in Coca-Cola’s stock is just beginning: analyst

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The rally in Coca-Cola’s stock (KO) is just beginning, said one closely watched beverage analyst on Wall Street.

“We see the company exiting FY21 transition year stronger for four reasons: 1) strong emerging markets despite still low vaccination rate, 2) on-premise recovering faster than originally forecasted, 3) restructuring and portfolio rationalization led to a more focused and agile organization, and 4) gross margin benefiting from incidence model. In addition, the valuation is compelling in light of improved fundamentals with a good line of sight for EPS to grow a 12% CAGR through FY23 reaching $2.71 that year, ex. potential divestiture of bottling assets,” said Guggenheim’s Laurent Grandet.

Grandet lifted his rating on Coca-Cola to Buy from Neutral with a revised price target of $66. He also increased his earnings projections on Coke for the next three fiscal years.

Coke’s shares rose 1% to $59.86 in pre-market trading Tuesday.

The analyst’s call comes as Coke has surprisingly been a top-performing stock these past three months.

Bottles of Coca-Cola soft drinks are displayed at a supermarket in the Brooklyn borough of New York. (Photo by Ramin Talaie/Corbis via Getty Images)

We say surprising as the company — along with rivals in the packaged foods space — continue to battle high levels of inflation that is weighing on profit margin potential. And for Coke specifically, 40% of its U.S. sales are on-premise and 30% is on-premise overseas (or tied to going out at restaurants, sporting events, etc.) — not a stellar place to be amid the ongoing, unpredictable pandemic.

Shares of Coke have rallied to the tune of 12% in the past three-months, according to Yahoo Finance Plus data. The S&P 500 has returned 9.4% during that same stretch.

But Grandet believes now is the right time to play Coke’s stock, citing better expense management under CEO James Quincey, a gradual return to normalcy in people going out to places and the recent acquisition of sports drink brand BodyArmor.

Adds Grandet, “We think the company is emerging leaner, and more agile with a portfolio focused on larger and more profitable brands that should drive better efficiency. The savings should help support marketing investments in 2022 back to 2019 level which should benefit the top line. In addition, the acquisition of BodyArmor — now included in our model — could add 300 points of growth to the North America segment and 100 basis points to the consolidated company in FY22.”

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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