Deutsche Bank says fear of dying soda industry is overblown, recommends Coca-Cola, Pepsi

Key Points
  • Deutsche Bank initiates coverage of Coca-Cola, PepsiCo, and Dr Pepper Snapple Group at buy, arguing the companies are addressing new competition and pricing pressure.
  • "Such concerns have now become the dominant market narrative," wrote analyst Steve Powers. "Beverage companies today are far more accepting of their new realities."
  • Shares of PepsiCo are up 13 percent this year while Coca-Cola and Dr Pepper Snapple are up 11 percent and 3 percent respectively.
A man delivers beverages from a Coca-Cola truck in New York City.
Getty Images

Despite a host of challenges facing consumer staples, Coca-Cola, Pepsi and Dr Pepper Snapple Group all buying opportunities, according to Deutsche Bank.

With analysts across Wall Street cautious on the space due to new competition and pricing pressure, analyst Steve Powers argues that traditional beverages companies are up to the task.

"The door has opened to new (smaller, but agile) competition, which is increasingly leveraging digital technology and sophisticated third-party manufacturing to deliver compelling product options," wrote Powers on Wednesday. "Still, such concerns have now become the dominant market narrative—already making investors revisit past assumptions about normalized growth … Beverage companies today are far more accepting of their new realities versus 6 to 12 months ago, and are acting accordingly."

Starting with Coca-Cola, Powers highlighted the company's recent beverage initiatives and efforts to break into new categories. Recent projects at the beverage giant include a cola recipe sweetened only with stevia as well as a continued relationship with energy drink company Monster. Some analyst have even speculated that the company could venture into alcoholic mixers or booze in coming years.

"In our view, Coca-Cola is emerging from recent change determined to win across all beverages, while importantly shifting focus to price/revenue realization," the analyst explained. "This shift comes alongside promising efforts both to streamline internal operations (more speed, higher productivity), and optimize System alignment through Coca-Cola own refranchising."

The analyst's $52 price target represents 13 percent upside from Wednesday's close; shares are up 11 percent this year.

Meanwhile, Powers sees reignited acceleration at PepsiCo, arguing that the company's stock should climb 12 percent in the next year despite losing share to Coca-Cola.

"The domestic Frito business remains dominant, and is showing signs of renewed acceleration. Moreover, the building of Frito scale abroad remains a potential source of upside surprise," explained Powers. "While PepsiCo's North America beverage business is currently ceding share in the midst of Coca-Cola's refranchising, management seems to understand past shortfalls and has committed to increased investments."

Shares of PepsiCo are up 13 percent since January.

Powers also initiated coverage of Dr Pepper Snapple at buy despite recent concerns over its acquisition of antioxidant drink maker Bai earlier this year. The company faced a barrage of skepticism during its October earnings call as analysts voiced concern that the company lacks the experience to integrate new brands and ramp volume.

"We initiate on Dr Pepper Snapple with a Buy rating and $104 price target, viewing tail risks from Bai disappointment as already priced in," said Powers. "With roughly 13 percent upside to our price target, Dr Pepper Snapple offers an attractive return, nothing that the company could see significant benefits from proposed tax reform."

Dr Pepper Snapple shares are up 3 percent this year.