RBC: Coca-Cola Is Our Top Mega-Cap Idea

RBC Capital’s Nik Modi maintained an Outperform rating on The Coca-Cola Co KO, while raising the price target from $47 to $51.

Top Mega Cap Idea

Naming the stock as RBC Capital’s favourite mega cap idea, Modi mentioned that greater upside was expected for Coca Cola than its mega cap peers, with close to 20 percent total return over the coming 12 months and 60 percent upside potential over the next five years.

Modi also pointed out that that over the last 30 years, the stock has seen “6 distinct periods of multi-year outperformance/under performance,” as compared to the S&P 500 and its mega cap peers, with each period lasting from 3 to 8 years.

Inflection Point

“Based on our work, we believe we are at the precipice of KO inflecting to a period of sustained outperformance, particularly among its consumer staples mega cap peers under our coverage,” Modi stated.

In addition, the analyst pointed out that investors were overlooking four distinct drivers for the stock, including volume acceleration driven by refranchising, the company’s new marketing approach and its impact on market share trends and category growth, the growing “cost culture” at Coca Cola, which is expected to drive best-in-class profit per employee, and the company’s emerging pricing power.

However, Modi also believes that due to the company’s announcement of accelerated refranchising, the consensus revenue and EPS forecasts were likely to be revised down.