Jonathan Knowles
Wells Fargo previewed the earnings season in the beverage sector, selecting two stocks as potential outperformers and two that investors may want to be cautious with.
The firm thinks Coca-Cola (NYSE:KO) will post one of the better quarters of all the consumer staples stocks. Analyst Chris Carey sees the potential for double-digit organic sales growth, benefiting from inflation and improved volume. Notably, Coca-Cola (KO) is also anticipated to see triple-digit gross margin expansion, driven by structural changes to the business. Wells Fargo sees prospects for an EPS guide hike even if FX pressure is a touch worse. Meanwhile, the outlook for PepsiCo (NASDAQ:PEP) is a little shakier. The company is seen as needing to adjust its organic sales from “at least 4%” to a more achievable level.
The view on Keurig Dr Pepper’s (KDP) is that the U.S. refreshment business could miss and blunt a story that has a sequential acceleration in sales dynamic against a group that features low valuations. Carey and his team think this is why the stock has faded over the past several weeks. The expectation is that KDP will see solid delivery in Q2, and consumption trends suggest that the U.S. refreshment portfolio is very much primed to accelerate through the year. “Meanwhile, Coffee looks stable, and we actually raised our volume estimates on higher brewers. All-in the KDP story feels on track,” updated Carey.
Wells Fargo also has a favorable impression of Vita Cocoa (LOCO) ahead of the company’s earnings report. COCO was described as one of the few names in Staples that is seeing accelerating sales trends in Q2 vs. Q1. “While there is noise in the model right now (oil business coming out), the underlying trend here is strong,” updated Carey. COCO is seen having enough flexibility with its messaging around Q2 gross margin to survice the earnings release. However, investors are tipped to monitor any commentary around a big step-up in freight rates.
Monster Beverage (MNST) is seen as one of the most interesting ideas in the sector heading into the round of earnings reports, while Molson Coors (NYSE:TAP) is seen struggling as Anheuser-Busch InBev (BUD) takes back some market share. Wells Fargo warned TAP’s depletions for Q2 will fall 7% vs. the consensus estimate of -5%.
The beverage stocks with the very highest Seeking Alpha Quant Ratings are Vita Coco (NASDAQ:COCO), Coca-Cola (KO), National Beverage (FIZZ), and Coca-Coca European Pacific (CCEP).