Wells Fargo Taps Coca Cola, Monster In The Beverage Stock Race

Wells Fargo analysts initiated coverage of a handful of non-alcoholic and alcoholic beverage companies:

• Coca-Cola Co KO at Overweight, $62 price target.
• Keurig Dr Pepper Inc KDP at Equal-Weight, $33 price target.
• Molson Coors Beverage Co TAP at Equal-Weight, $51 price target.
• Monster Beverage Corporation MNST at Overweight, $105 price target.
• PepsiCo, Inc. PEP at Equal-Weight, $157 price target.

Coca-Cola's 'ReKOvery' Underway: The bullish case for Coca-Cola is based on expectations for the beverage giant to outperform versus expectations across several metrics, Wells Fargo's Carey said in a note. The COVID-19 pandemic resulted in a temporary shift in how people consume Coca-Cola but demand never fell so a recovery to the point where "COVID had never happened" will be seen by early 2023.

Wall Street's current estimates are at least $1 billion short of Wells Fargo's estimates despite a return back to some form of a new normal.

The beverage company is likely to identify dozens of single-country brands that offer little or no scale and growth opportunities. The research firm identified 78 "Zombie" companies that account for just 2.3% of global sales but showed declining sales in 2019. These brands will likely be on the "chopping block."

Bottom line, Carey said the pandemic ushered in a mere channel shift but won't have a permanent change to consumption habits and trends.

Keurig Has Growth Concerns: Keurig Dr Pepper deserves credit for performing well throughout the pandemic and even outperforming rivals in certain categories, Carey said. The Street is modeling strong growth beyond fiscal 2021 but Wells Fargo doesn't share a similar projection.

Specifically, Carey said the company has shown a weighted average category growth of around 3% and has succeeded in growing margins by 600 basis points from fiscal 2018 through 2021. But expectations for mid-teens organic EPS growth after fiscal 2021 "could be difficult" as the company already benefited from synergies.

Related Link: Morgan Stanley Has A Caffeine Buzz For Keurig Dr Pepper

Molson's Two Key Questions: Beer company Molson Coors has seen its stock rise more than 40% since September as expectations had "fallen too low" and investors are correlated encouraging vaccine news with improving sales as the economy re-opens, Carey said.

But investors need to ask themselves two questions: 1) are there EPS catalysts to support higher expectations, and 2) has the company's growth algorithm changed that would justify the multiple expansion?

"Our work suggests 'no' to both for now," the analyst wrote in the note. "Sales/EPS expectations seem reasonable and TAP valued appropriately," the analyst wrote. "We see time to assess a recovery in TAP or capitalize on dislocations."

Monster Beverage Is One Of Two Major Players: The global energy beverage segment consists of just two players and Monster Beverage is a "scarcity play" on the large and fast-growing category, Carey said. Despite already impressive growth, the energy beverage is still in development based on per capita consumption.

The global opportunity remains "nascent" and Monster Beverage can leverage its relationship with Coca-Cola to sustain growth moving forward.

Waiting For PepsiCo's Confirmation Of Growth: PepsiCo can mostly be counted on to show organic sales growth as has been the case each year since 2013, Carey said. In fact, the company showed a global weighted average category growth of 5.1% in 2019 and this is the second-best among Wells Fargo's coverage.

However, a 5.1% growth is merely at the mid-point of its 4% to 6% sales algorithm but there isn't any real reason to suggest the growth rate can improve to the high-end of the range. To be clear, there are potential paths for this to be possible, such as through an M&A spree, but investors need signs of confirmation of growth before turning bullish.