An upgrade, a 'top pick' and a potential deal: 3 of our stocks make news Tuesday

Published Tue, Jan 16 20244:04 PM EST

We're taking a closer look at a few of our stocks in the headlines on Tuesday: Starbucks, Constellation Brands and Walt Disney. Below is a quick summary of the news, plus an updated Club take for each. Starbucks News: Morgan Stanley on Tuesday upgraded Starbucks to overweight from equal weighting, while also increasing its price target to $120 from $112. The firm's analysts said the stock has an "interesting risk reward skew" since the stock has come under pressure from recent weakness in U.S. sales, a slower Chinese economic recovery and protests accusing the company of taking sides in the Israel-Hamas war. While the boycotts are seen as a "transitory" headwind that could have a 1% to 2% impact to earnings, the first two headwinds are viewed as longer lasting. Still, Morgan Stanley remains confident that Starbuck's ability to increase costs can help protect earnings growth and that the China concerns are currently priced in the stock. The firm said it is looking beyond the current quarter, noting that Starbucks is "underearning vs its potential." Club take: While Starbucks is currently facing some challenges at home and abroad, the stock's recent slide already reflects those headwinds and we agree that it fails to anticipate what it could mean if they prove to be only temporary. The coffee giant has a loyal customer base, brand strength, and is constantly innovating its drink and food menu to attract more customers and increase wallet share. There's a self-help story here as well through the company's Reinvention Plan, which aims to improve both the partner and customer experience. The slowdown in the Chinese economy and competition from coffee rivals in the country create uncertainty about Starbucks' long-term growth in the region, but we remain optimistic about the recovery over time. Constellation Brands News: Bernstein named Constellation Brands its top pick for 2024 in a Tuesday research note. The company's stellar beer portfolio, which accounts for 86% of its profits, boasts premium Mexican beers Modelo, Corona, and Pacifico. Despite the U.S. beer industry's lower volume trends, STZ's beer business shows no signs of its brands losing momentum, the analysts noted. "This coupled with margin expansion and improved corporate governance, gives us conviction that the market's discount on STZ is undeserved," Bernstein wrote. The firm has an outperform rating on the stock and a price target of $325. Club take: The continued, volume-driven momentum of Constellation's beer business is why the company can continue to grow its earnings at a strong clip. But we can't say the same about the rest of the business. Due to industry challenges, we think management might be better served to divest its underperforming wine and spirits segment and reallocate that capital to further support beer growth and increase cash returns to shareholders. Jim said he has a source that says Constellation is shopping its wine and liquor business. If true, this could be a catalyst for the stock given the division's drag on company earnings. Disney News: Disney-owned ESPN is said to be in advanced talks with the National Football League that could give the league an equity stake in the sports network, according to a report by the New York Post . As part of a potential agreement, ESPN would take control of NFL Media, which includes NFL Network, and the league would receive equity in ESPN, according to the Post. Sources told the Post that discussions are far enough along that owners and the Players Association, the union that represents NFL players, are being told about the negotiations. Disney CEO Bob Iger has previously said Disney is open to strategic partners with the sports network that can help with distribution as well as the transition to streaming. Wells Fargo said Monday an ESPN-NFL partnership would make ESPN the "key transition partner" as the NFL moves from linear to streaming. Analysts called an ESPN-NFL deal an "upside" that provides higher value and lower risk. Club take: Over the past few years, the sports media industry has dramatically evolved due to the massive wallets of tech companies like Amazon and Alphabet . Expensive sports rights have pressured the cash flow and margins of legacy companies like Disney. That's why a potential partnership that would give equity ownership of ESPN to a professional sports league would be so interesting. It means both the league and ESPN would participate in upside and it would secure the network's position in the future of sports, whatever that may be. After years of struggling, ESPN has become one of Disney's stronger assets and it's only a matter of time before Disney turns it into a standalone direct-to-consumer product. But figuring out ESPN's home is only one piece of the puzzle. The key for Disney right now is to find more ways to manage its expenses and make its collective streaming services profitable and on a path toward Netflix-like margins. The influence of activist investor Nelson Peltz may be what's necessary to make that final push. (Jim Cramer's Charitable Trust is long SBUX, STZ, DIS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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People picket outside of a Starbucks store in New York's East Village as Starbucks Workers United have announced that they are waging the company's largest strike Thursday on the coffee company's Red Cup Day on November 16, 2023 in New York City.

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