Coke, Pepsi Lose Fizz at RBC, Downgraded on Valuation

Coke and Pepsi were downgraded to sector perform at RBC on valuation.
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Coca-Cola  (KO) - Get Report and PepsiCo  (PEP) - Get Report were both downgraded to sector perform from outperform by a RBC analyst who says the drinks giants are near fully valued and the broader path to normalization from the pandemic "will be longer than consensus is currently baking in." 

Shares of Coke, Atlanta, at last check were down 3.9% to $52.72, while PepsiCo, Purchase, N.Y., gave back 3.1% to $143.66.

RBC Capital analyst Nik Modi affirmed his $55 price target on Coca-Cola and his $153 price target on Pepsi.

"While the approval/distribution of vaccines is certainly encouraging, we feel headlines have provided a false sense of security to already fatigued consumers," Modi said. 

"As such, we expect covid-19 case counts and the associated death toll to continue to remain elevated through January and February."

Over the past few years, the analyst said in an investors' note, Coca-Cola "has emerged as a leader across the [consumer packaged goods] space."

"Our downgrade rationale is simple -- we feel valuation is near-full and believe upwards EPS revisions are unlikely over the next few quarters as the negative implications of covid last longer than consensus assumes," Modi said.

While Coca-Cola's results will likely remain under pressure near term, the analyst said, "we point out that this is a channel issue, not a company-specific issue."

Modi said PepsiCo will be able to maintain top-line momentum via improving consumer insights and stepped-up reinvestment.

But at 24 times expected 2021 earnings, which is a "half-turn away from its five-year peak," Modi said he was "hard-pressed" to see material share price upside in PepsiCo.

"At this point, it is clear to us that PepsiCo's chief executive, Ramon Laguarta, has taken a more growth-oriented posture than his predecessor," the analyst said.