Morgan Stanley Downgrades Coca-Cola And Monster Beverages

Morgan Stanley's bullish case for Coca-Cola Co KO and Monster Beverage Corp MNST can no longer be justified amid the coronavirus outbreak.

The Analyst

Dara Mohsenian downgraded Coca-Cola's stock from Overweight to Equal-Weight with a price target lowered from $65 to $52.

The analyst also downgraded Monster Beverage's stock from Overweight to Equal-Weight with a price target lowered from $78 to $63.

The Thesis

Mohsenian said government-mandated closures of business, a ban on public gatherings, among other coronavirus-related headwinds dictates a bullish stance on Coca-Cola and Monster Beverage can't be justified. While these trends are mostly understood, the path forward is unclear and there are four main areas of risks for the beverage companies.

The risks specific to Coca-Cola include:

1. Lower potential revenue and profit from a shift in sales away from home to take-home.
2. The Costa business is mostly store-based and represents a mid-single-digit rate of total sales.
3. Coca-Cola's bottling partners could require greater financial support.
4. Coca-Cola's debt leverage of 2.7 times 2019 net debt/EBITDA is above its mega-cap peer average of 1.5 times which limits its ability to driving shareholder value.

Monster Beverage's exposure to gas stations and convenience stores is a "significant concern" as both end-markets account for around 70% of total sales, the analyst wrote in a note.

The company is backed by a "very strong" balance sheet and strategic potential but shares are down just 6% since the start of 2020 (when the note was published), which warrants a cautious move to the sidelines.

Price Action

Shares of Coca-Cola traded lower by 10% at $42.08 while shares of Monster were also lower by 10% at $54.20 at time of publication.

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