Jefferies analyst Kevin Grundy on Monday initiated coverage on the beverage sector.
Companies To Buy
Jefferies initiated coverage on PepsiCo (NYSE: PEP) with a Buy rating and $102.00 price target. The analyst is optimistic on the company's brand, margins, favorable tailwinds and market share. Grundy sees room for upside in PepsiCo's FY14 guidance, noting favorable near-term and long-term opportunities.
The analyst initiated coverage on Monster Beverage (NASDAQ: MNST) with a Buy rating and $82.00 price target. Jefferies called Monster the “best secular growth story in the LRB space” with high expectations for U.S. sales growth and international expansion.
Jefferies wrote, “KO's portfolio is over-levered to CSDs (74% of volume), health & wellness trends aren't going away, and KO's commentary suggests game changing M&A is unlikely. KO is a great company, although it seems less likely to us that it will return to being a great stock in the current environment.”
Dr Pepper Snapple Group (NYSE: DPS) was also initiated with a Hold rating and $53.00 price target. The analyst emphasized that the business had good operators and is a “very well-run company navigating through a difficult industry environment.”
After reviewing the numbers, though, Grundy remarked that the stock is up 21 percent year-to-date versus the three percent growth by the beverage peer group. The analyst added that there is additional risk to shares from speculation.
Jefferies initiated coverage on Cott (NYSE: COT) with a Hold and $7.80 price target. Grundy highlighted the company's “disadvantaged” business model versus competitors.
The analyst commented “The increased industry volume pressures add to earnings risk at Cott. COT's cheap valuation (14.8% CY15e levered FCF yield) is tempting, but FY13-14 YTD has been a painful reminder of the inherent risks in the business, and how volume deleveraging as price gaps close can materially compress margins and impair profitability and cash flow. Investors should be aware that Cott's FCF has declined at a 10% CAGR during FY10-13, which is emblematic of these risks.”
Coca-Cola Enterprises (NYSE: CCE) was initiated with a Hold rating and $45.00 price target. Grundy noted that shareholders of Coca-Cola Enterprises have enjoyed the “benefits” of share repurchases with “sub-par FCF conversion augmented by a gradual increase in debt leverage. In many ways, this has masked CCE's deteriorating underlying performance. With leverage approaching targeted levels, the pace of buybacks is likely to moderate or level off.”
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