Analyst Sees 'Merit' In Buying Coca-Cola And Pepsi, But Which Stock Has More Upside?

The Coca-Cola Co KO and PepsiCo, Inc. PEP both enjoy an attractive market share across attractive categories so there is "merit" to owning either stock, according to Atlantic Equities.

The Analyst

Atlantic Equities' Edward Lewis initiated coverage of Coca-Cola's stock with an Overweight rating and $62 price target. The analyst initiated coverage of PepsiCo with an Overweight rating and $145 price target.

Coca-Cola: Major Transformation

The bullish case for Coca-Cola is based on management's continued shift away from sparkling soft drinks (SSDs) towards a complete beverage company across both hot and cold categories, Lewis wrote in a note. Coca-Cola and its bottling partners are "aligned like never before," which better positions the company to take advantage of new opportunities.

Lewis said Coca-Cola's performance over the past few years is both consistent and encouraging, highlighted by eight consecutive quarters of more than 4% organic sales growth. By region, 70% to 80% of sales and operating income come from outside of North America with notable exposure to faster growth regions in Latin America and Asia-Pacific.

At a time when the consumer staples companies are merely showing signs of recovering Coca-Cola stands out amid expectations for 5% organic sales growth of 5%, operating income growth of 8% and earnings growth 10%.

PepsiCo: Delivering On Key Priorities

PepsiCo's management team led by recently appointed CEO Ramon Laguarta continues to work on improving multiple segments, including the snack division Frito-Lay North America (FLNA), Lewis wrote. The company controls a 19% market share in the global micro snacks market, which implies plenty of room for further growth.

Meanwhile, Pepsi Beverage North America (PBNA) reversed a "recent slump" in the key developing marketsw, hich is now showing a high-single digit sales growth.

Lewis said fiscal 2019 will likely prove to be a year of earnings "reset" as management increases the pace of multiple investments in business units, the analyst wrote. Backed by a strong balance sheet, an attractive dividend, share buyback program and a strong record of preferring organic growth over acquired growth, the stock can sustain a premium valuation over rivals.

Coca-Cola Over PepsiCo

Coca-Cola and Pepsi each boast a similar outlook of mid-to-high-single digit organic sales and EPS growth even though there are many contrasts between the two. Between both names Coca-Cola's stock offers a potential 15% return versus PepsiCo at 11%. Nevertheless, relative to other consumer names there is sufficient reason to own both names.

At time of publication, shares of Coca-Cola were trading at $54.10 while PepsiCo shares were trading at $131.42.

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