Morgan Stanley: Buy PepsiCo's Fizz Over Keurig Dr Pepper

PepsiCo, Inc. PEP and Keurig Dr Pepper Inc KDP trade at similar valuations, which implies one of the two stocks is notably undervalued, according to Morgan Stanley.

The Analyst

Morgan Stanley analyst Dara Mohsenian maintains a Buy rating and $154 price target on PepsiCo's stock.

The analyst maintains an Underweight rating on Keurig Dr Pepper with an unchanged $24 price target.

The Thesis

PepsiCo and Keurig's stock both trade at similar valuations across the "most relevant metrics," including EV/EBITDA and free cash flow, Mohsenian wrote in a note. Taking a look at both companies, it's clear PepsiCo offers a superior top-line growth profile. The company has much better exposure to high growth categories like salty snacks along with better access to emerging markets.

Meanwhile, Mohsenain said bulls will argue Keurig's mid-to-high single digit coffee pods volume growth is a reason to like the stock, but there are multiple points being overlooked. Specifically, Keurig is seeing price declines in the coffee pods category along with slower growth in brewers relative to pods and faster growth in lower priced private label pods.

PepsiCo also offers higher visibility on margin growth compared to Keurig over the coming years. In fact, Keurig's own objectives are questionable as it implies $600 million of cost synergies from the Dr Pepper deal which is at the high-end of similar mergers and includes "very limited" product overlap.

Keurig's stock comes with a high debt leverage of around 4.9 times net debt/EBITDA while the exclusion of amortization from adjusted EPS is worth one times on a P/E basis, the analyst wrote. On a EV/EBITDA basis, Keurig's stock is trading at an approximate 5% premium to PepsiCo which can't be justified given the multiple concerns highlighted.

Price Action

Shares of PepsiCo closed flat Monday while Keurig Dr Pepper's stock closed lower by 0.36% at $27.49.

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