While Credit Suisse rates both stocks "outperform," the Swiss bank expects Coke to outperform Pepsi during the next year. Credit Suisse expects Coke's stock to advance 41% to $95, and Pepsi shares to climb 25% to $85. Analysts' median price target for Coke implies a 13% gain, slightly less than Pepsi's median upside projection of 14%. JPMorgan Chase ( JPM - Get Report) also has positive ratings on both Coke and Pepsi, though its price targets are below those of Credit Suisse. In a research note, JPMorgan recently criticized Coke's decision to focus on sales volume, rather than pricing, citing negative earnings revisions as a headwind to the stock. However, JPMorgan said it expects to see pricing improvements in the second half of the year. Coke delivered 5% global volume growth during the first quarter, an impressive rate, while operating profit increased 10%. However, JPMorgan notes that when accounting for currency exchange and the effects of the Coca-Cola Enterprises ( CCE) asset acquisition in October, "pro forma operating profit grew only 1%." It lowered its second-quarter earnings estimate to 3 cents less than consensus on this signal of ongoing negative operating leverage. JPMorgan still calls Coke the "best in class among our large-cap multi-nationals in the beverage universe" because of its impressive organic growth. Price increases could provide a catalyst for the stock. Those, like JPMorga,n who are calling for margin improvement might boost their targets on such a move. Commodity costs are proving a challenge for many companies, whose managers must decide whether to pass on higher material costs to consumers. Coke has been cognizant of its customers, using "$300 million to $400 million of accretion from the CCE transaction to offset commodity price increases." Keeping prices low might help the firm to inspire brand loyalty. Long-term shareholders like the strategy. Berkshire is holding steady, with an 8.7% stake in Coke. State Street ( STT) and JPMorgan, both among Coke's 10 largest stockholders, increased their stakes last quarter. According to Nielsen data, Coke has gained domestic market share from competitors Pepsi and Dr. Pepper Snapple Group ( DPS) in the past 12 months. Coke's stock has risen 3.7% in a month, outpacing the S&P 500 ahead of earnings. Coke has beaten analysts' earnings expectations in four of the past five quarters. The company's first-quarter earnings fell short of estimates, sending the shares down 1%. With low pricing likely to persist, an earnings sell-off may provide an attractive entry point.
-- Written by Jake Lynch in Boston.
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