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Coca Cola products are displayed in a cooler at a convenience store
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While the date on the calendar changed, not much else did with the new year, in terms of the stranglehold that the pandemic has on many people’s lives. That is bad news for Coke and Pepsi, according to RBC Capital Markets.
Analyst Nik Modi took a look at the consumer food and beverage landscape Monday, saying that recent headlines about the first successful vaccinations last month “have provided a false sense of security to already fatigued consumers.” While everyone seems prepared for Covid to remain a threat throughout the winter, he warned that just making it to spring wouldn’t mean a return to normalcy.
The difficulty of distributing vaccines, and public hesitancy to take them, “will prolong material progress until the second half of 2021,” he said. Even people who have been vaccinated can still spread the virus, meaning that social distancing is probably here to stay until at least midsummer. In addition, employers are likely to err on the side of caution in terms of when they ask workers to return to the office.
The problem for big beverage makers, Modi noted, is that these issues together push back the timeline for a return to normal life, with people attending public events and dining in restaurants.
Modi downgraded
Coca-Cola
stock (ticker: KO) to Sector Perform from Outperform, while maintaining a target of $55 for the share price. He believes that the company is making smart, long-term moves, but that “the near-term appears out of their control.”
Modi said that while Coke should emerge from the crisis stronger, its “valuation is near-full and…upwards earnings per share revisions are unlikely over the next few quarters as the negative implications of Covid last longer than consensus assumes.”
Roughly half of Coke’s business comes from away-from-home sales.
The analyst was not much more enthusiastic about
PepsiCo
(PEP). Modi said that while the company will benefit as consumers stuck at home eat more snacks, as well as the economy’s gradual reopening, he said PepsiCo’s valuation also looks full, with little potential for higher earnings.
He said he is also concerned that a continuing legal wrangle between Pepsi and the maker of Bang Energy Drink over a distribution agreement could prove a distraction for management that would benefit
Monster Beverage
(MNST).
Coke and Pepsi were both off 0.1% in early trading, slipping to $54.81 and $148.10, respectively. The
S&P 500
was down 0.3%
Coke ranked in the bottom half among stocks in the
Dow Jones Industrial Average
in terms of 2020 performance. Barron’s believes that there are better days ahead, and that the shares look attractive on a yield and valuation basis.
Write to Teresa Rivas at [email protected]
