Which Beverages Stocks Will Pop? UBS Weigh In On The Sector

Investors thirsty for exposure to beverage stocks have many options available, but which names will outperform? UBS analysts updated their view of the sector on Dec. 12 and initiated coverage of new names. Here's a summary of what companies the research firm are recommending investors buy and avoid.

Soft Drinks

Coca-Cola: 'Not A New Coke'

UBS' Sean King downgraded The Coca-Cola Co KO from Buy to Neutral with a price target lifted from $50 to $51.

Shares of Coca-Cola are trading at a premium to its historical average on both a P/E and EV/EBITDA basis, King said in the Dec. 12 note. The premium valuation is warranted given the company's improved operating metrics as the result of a re-franchising initiative and an overall market-wide shift towards defensive stocks.

King thinks Coca-Cola's multi-billion dollar acquisition of UK coffee chain Costa poses the risk the company is "reaching too far outside its core" to generate growth. As such, further clarity is needed on the transaction to determine if it's a positive lever of growth or note.

Related Link: National Beverage Maintains Its Fizz...For Now

PepsiCo: Stability For Investors

King initiated coverage of PepsiCo, Inc. PEP with a Neutral rating and $123 price target.

PepsiCo's stock has upside potential as it's an ideal stock for investors looking for defensive characteristics and a consistent growth profile, King said a note. Heading into 2019 there are some competitive concerns that would need to be addressed by the first CEO change in 12 years. Under the new leadership, PepsiCo CEO Ramon Laguarta could offer investors a low bar to guidance.

Monster Beverage: Risk To Growth Story

King initiated coverage of Monster Beverage Corp MNST with a Sell rating and a $48 price target.

Energy drink maker Monster Beverage has shown investors a double-digit growth rate, but King said this level of growth isn't sustainable. UBS Evidence Lab data and checks suggests a 4 percent pricing increase to the company's drinks will result a 2.7 percent drag on underlying volume trends. As such, the analyst is modeling Monster Beverage's sales to fall 3 percent below the Street's estimates in fiscal 2019 and fall short by 6 percent in the year after.

Keurig Dr Pepper: Ahead Of Competitors

King initiated coverage of Keurig Dr Pepper Inc KDP with a Buy rating and $32 price target.

One part coffee company, one part soft drink company, Keurig Dr Pepper is "ahead of the curve" in terms of diversification, King said. The soft drink side of the business benefits from Dr Pepper's superior elasticity compared to its peers while the coffee side of the business boasts a direct relationship with its parent company's global coffee assets.

Carbonated Water

King initiated coverage of National Beverage Corp. FIZZ with a Sell rating and an $80 price target.

LaCroix branded water accounts for 70 percent of National Beverage's total sales and essentially accounts for the entire investment thesis, King said. Recent trends now calls into question the scarcity and value of the brand, including a slowdown in company wide growth from 17/18 percent in fiscal 2018 to expectations of 8 percent in 2019. Exiting 2019, the company's growth is likely to continue decelerating by 100 basis points a year before stabilizing at just 3 percent in 2024.

Beer

Molson Coors: It's Time To Buy

King initiated coverage of Molson Coors Brewing Co TAP with a Buy rating and $80 price target.

Molson Coors is the cheapest name in the entire beverage industry at 13 times earnings, King said. The stock is also trading at a 40 percent discount to its beer peers and should be bought given expectations for a return to positive volume growth by fiscal 2019 and stable annual volume growth by 2021.

Boston Beer Company: Intense Competition

King initiated coverage of Boston Beer Company Inc SAM with a Sell rating and $228 price target.

UBS' first hand checks into the parent company of Sam Adams suggests investors aren't fully appreciating the competitive landscape, King said. Specifically, recent success in new categories like Hard Seltzer can be duplicated by larger competitors that boast better unit economics. As such, sales could decelerate from 17 percent growth in fiscal 2018 to just 6 percent in fiscal 2020.

Related Link: 2 Beverage Companies Jim Cramer Says Aren't Getting Enough Recognition

Alcohol

Constellation Brands: Wait For The Smoke To Clear

King initiated coverage of Constellation Brands, Inc. STZ with a Neutral rating and $209 price target.

Constellation Brands has multiple near-term disruptive events that investors may want to let play out before buying the stock, King said. These include the closure of the dilutive investment in Canopy Growth Corp CGC, re-balancing wine inventory and a transition in management.

Brown-Forman: Clarity Needed

King initiated coverage of Brown-Forman Corporation (NYSE: BF-A) with a Neutral rating and $48 price target.

Brown-Forman's recent second-quarter earnings report called into question the company's ability to pass on tariff related price increases to customers, King said. In addition, the report marked the start of increased price gaps with its peers in the U.S. market. Given the stock's multiple of 26 times earnings, which represents a 10 percent premium to the beverage group, investors may want to consider staying side-lined until there's clarity related to tariffs.