The stocks of soda giants PepsiCo, Inc. (ticker: PEP) and The Coca-Cola Co ( KO) may be going flat.
On Wednesday, BMO Capital downgraded both stocks from “outperform” to “market perform.” The two stocks simply have no clear catalyst for earnings growth within the next 18 months, analyst Amit Sharma says in the downgrade note. “It’s difficult to argue for a meaningful multiple expansion from current levels, particularly given that earnings growth is unlikely to significantly accelerate in the next 12 to 18 months.”
Coca-Cola’s trailing price-earnings ratio of 32 is at its highest level of the past decade. Pepsi’s P/E ratio of 25.2 is also on the high end of its 10-year range.
[See: 9 Ways to Buy Stocks That Everyone Needs.]
Without the potential for major earnings growth, Sharma says PEP and KO would need a different catalyst to send their share prices higher. However, investors hoping that the catalyst will come via merger and acquisition deals will likely be disappointed. There have been market rumors of a potential merger between Coca-Cola and Kraft Heinz Co. ( KHC). Separate rumors have also paired Pepsi with Kraft Heinz and Mondelez International ( MDLZ) as potential merger partners.
Unfortunately, there is no “compelling strategic rationale” for any of these deals, and neither Pepsi nor Coca-Cola has given any indication it would be a willing seller, Sharma says.
One possible scenario that could keep Coca-Cola and Pepsi shares elevated would be an unforseen geopolitical disruption. If investors get more cautious about the overall outlook for the global economy, they may see the two stocks as low-risk, safety plays. The two blue-chip stocks offer investors a relatively stable investment option, and both stocks have a dividend yield of greater than 2.7 percent.
[See: 20 Awesome Dividend Stocks for Guaranteed Income.]
For now, at least, Sharma sees better beverage investment opportunities elsewhere. BMO has upgraded Dr Pepper Snapple Group ( DPS) and Cott Corp. ( COT) to “outperform.”
“DPS and COT are uniquely positioned to have upwards bias to both earnings estimates and valuation multiples as investors gain better understanding of their large, strategic acquisitions, strong management teams and likely easing of near-term operational concerns,” Sharma says.
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Wall Street Is Wary of The Coca-Cola Co (KO) and and PepsiCo, Inc. (PEP) originally appeared on usnews.com
