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Drink Up, It’s Time to Stock Up On Beverage Shares: Analyst

Monday, 7 May 2012 | 11:58 AM ET

Better times may be ahead for U.S. beverage stocks, according to Morgan Stanley analyst Dara Mohsenian.

AP

Mohsenian upgraded his rating on the beverage sector to “attractive” from “in-line,” citing improving trends for carbonated beverages, driven by rebounding volume and solid pricing. Also, since beverage stocks have been weak compared with the rest of the market, it is an “opportune entry point,” he said.

As part of this move, Mohsenian also changed the ratings on several stocks within the sector. Perhaps most notable was his call on PepsiCo , which was upgraded to “overweight” from “equalweight.”

For Pepsi, it’s a “win-win situation,” according to Mohsenian.

“Either higher marketing [spending] pays off (vs. skeptical Morgan Stanley/market expectations) and the stock outperforms, or continued fundamental struggles may lead to more drastic action, including management/strategic changes, which could unlock shareholder value,” he wrote in a research note Monday.

Pepsi’s management has already indicated that if its direct-store delivery beverage segment doesn’t turn around within 12 to 18 months, it will consider options.

“Our sum-of-parts points to 11 percent fair value upside, and while Pepsi indicated it does not believe a Frito-beverage split should occur, this viewpoint could change with continued struggles,” he said.

Pepsi’s management team has been against splitting up the two businesses because the units realize lower costs from being joined together. However, the poor performance of Pepsi’s beverage business, which has lost market share in the carbonated soft drink segment, is weighing down the valuation of Frito-Lay. Separated, Frito may realize a higher multiple, which may be more of a benefit to the company than cost savings from a shared supply chain and procurement systems, Mohsenian said.

While this plays out, he also thinks that the company should be able to meet or slightly exceed average analysts’ earnings forecasts for 2012 and 2013.

Mohsenian, who is rated three stars by Thomson Reuters StarMine for the accuracy of his earnings estimates, has a price target of $77 on PepsiCo shares.

The analyst also upgraded Cott to “overweight” from “equalweight,” while Dr Pepper Seven Up shares were upgraded to “equalweight” from “underweight.” Both companies stand to benefit from the improving trends for soft drink sales. Cott also has been focusing on returning cash to its shareholders.

As for Coca-Cola and alcohol stocks such as Molson Coors , Constellation Brands and Brown-Forman , his opinion is neutral at this time. As the industry leader, Coke shares have already benefited from these trends.

Within the alcohol names, there are a variety of issues, ranging from limited visibility on Molson’s acquisition of StarBev, to uncertainty in the beer market.

Questions? Comments? Email us at consumernation@cnbc.com. Follow Christina Cheddar Berk on Twitter @ccheddarberk.

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