Morgan Stanley Upgrades Coca-Cola to Top Pick

Morgan Stanley announced this morning that they are upgrading Coca-Cola (Ticker Symbol: KO) to overweight from equal weight.  The investment bank and financial services company also raised its price target on the soft drink giant from $52.00 to $55.00, citing that Coca-Cola has a superior growth outlook relative to its peers in the industry and it is trading at a discount as well. The analyst that made the call, Dara Mohsenian, said that “Coke is now our top mega-cap staples pick at Morgan Stanley.”

This announcement was on the heels of solid earnings and guidance report in late April. Coco-Cola reported an earnings per share beat of .48 vs. Wall Street analysts’ expectations of .46 cents.  Revenue also came in better than expected at $8.02 billion vs. $7.88 billion that Wall Street was looking for. The strong report was led by Coca-Cola Zero Sugar which has had double-digit growth for the past six quarters.  Coca-Cola also launched Orange Vanilla Coke, its first new flavored drink in over a decade in the first quarter of this year.

Coca-Cola’s stock started off to a weak start in 2018, trading down over 10%. The stock found itself trading in a three dollar trading range between the $42.00 and $45.00 price levels for most of the first two quarters of 2018. In that same quarter, the stock bottomed, forming a bullish divergence pattern, where the stock makes a lower low in price but the Relative Strength Index makes a higher low. (As indicated on the chart by the purple circles) Traders and investors sometimes look at divergences for a possible pause within the current trend which can, at times, lead to a reversal, as occurred in Coca-Cola’s case.  Coca-Cola’s stock proceeded to break above its 2018 downtrend and continued to rally over 20%, trading to an all-time high of $50.84 on November 20, 2018.

Coca-Cola started off into 2019 on a positive note grinding higher, looking as if it was going to test the all-time high it just made in the previous quarter.  However, the stock took an unfortunate turn for the worse, after a weak earnings and guidance report that sent the stock gapping lower over 7% in the first quarter of 2019.  Coca-Cola found some life just below the $45.00 dollar level and has been inching higher since. Recently, the stock found support at it 100 and 200-day Moving Averages and currently is just 4% away from its all-time high.  

(Chart above courtesy of ​​)    

Based on a survey of 13 analysts offering 12-month price targets, the average price target for Coca-Cola’s stock is $51.18. According to that number, the stock is priced at a discount relative to Wall Street’s analysts and could be considered undervalued around current levels near $48.67.   

Coca-Cola recently purchased British coffee chain Costa for over $5 billion. The company also has plans to launch Coca-Cola Coffee, which has had a successful run in Asia, in more than 25 markets across the globe.  To shareholders’ delight, legendary investor Warren Buffet is still a major holder of Coca-Cola stock and the stock is still a top three holding of Buffet’s Berkshire Hathaway. Investors should look to Coca-Cola’s next earnings release on July 30th for fresh news on the company.    


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