Morgan Stanley Turns Bullish On Coca-Cola, Sees Encouraging Signs In Q2 Report

Beverage giant Coca-Cola Co KO is trading at an "outsized valuation discount" versus its peers, and investors should take advantage of the compelling valuation gap, according to Morgan Stanley.

The Coca-Cola Analyst: Dara Mohsenian upgraded Coca-Cola from Equal-weight to Overweight with a price target lifted from $52 to $54.

The Coca-Cola Thesis: Morgan Stanley moved to the sidelines in the early days of the COVID-19 pandemic given Coca-Cola's 40% exposure to eating and dining out and another 10% of the business tied to gas and convenience channels, Mohsenian said in a Wednesday upgrade note.

Yet Coca-Cola's recent second-quarter print looks to signal a bottom point,and consensus estimates moving forward are "more reasonable," the analyst said. 

Some of the encouraging takeaways from Coca-Cola's print are as follows, he said:

• Unit case volume improved from negative 25% in April to down by mid-single digits to-date in July.
• Volume weakness was tied to short-term lockdown measures.
• Coca-Cola expects to return to pre-pandemic levels before a global economic recovery.
• Coca-Cola will protect forward earnings through productivity improvements.

The stock has underperformed the S&P 500 index by 2,800 basis points over the past fourth months and underperformed its mega-cap consumer packaged goods peers by 1,700 basis points, Mohsenian said.

From a valuation perspective, Coca-Cola's relative NTM P/E multiple implies a 3% discount versus mega-cap peers, and this is also more than one standard deviation below the 10-year average, the analyst said. 

The same holds true for out-year estimates, as Coca-Cola's stock is trading at a 7% P/E discount to its mega-cap peers on 2022 estimates versus a 6% premium at the start of 2020, according to Morgan Stanley. 

KO Price Action: Shares of Coca-Cola were trading higher by 1.59% at $47.94 at last check Wednesday. 

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The Early Reaction To Coca-Cola's Q2

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