Morgan Stanley (NYSE:MS) analysts lifted Coca Cola stock to their Top Pick in the beverages sector, replacing Pepsi. The investment bank also raised the price target on Coca-Cola Co (NYSE:KO) shares from $70 to $78, implying around 10% upside from recent levels.
“We continue to like KO here in an absolute sense and even more relative to a group struggling with slowing OSG (organic sales growth), as Coke's fundamentals increasingly disconnect favorably from the group,” analysts said in a note.
They note that stock picking within beverages has been challenging, with "alpha" becoming harder to find due to a split between stocks with higher relative valuations—those with solid visibility but limited upside after recent gains—and those with depressed valuations but facing fundamental pressures.
According to Morgan Stanley, Coca-Cola stands out as a unique "tweener" option. The analysts believe that, fundamentally, KO is well-positioned to deliver strong, above-consensus, and above-peer long-term OSG in what they term a "Topline Landing" industry scenario, as industry pricing trends weaken.
In addition, they point out that Coca-Cola offers an attractive valuation, “generally trading in-line to at relative discounts vs. long-term averages vs. key large-cap peers despite improving fundamentals.”
The Wall Street firm identifies four key advantages that support its overweight rating on Coca-Cola compared to its peers.
They point out Coca-Cola's healthier volume growth, which is crucial as the industry’s unsustainable pricing trends wane. This, coupled with Coca-Cola's strong pricing power, bolsters confidence that the company will maintain a higher organic sales growth rate than its competitors over the long term.
In addition, Coca-Cola benefits from strong international trends, particularly in emerging markets, where growth is outpacing North America. The company’s durable pricing power and market share gains are expected to become increasingly important as the broader industry's pricing tailwinds diminish.