9 Beverage Stocks to Buy, Sell and Hold
Beverage stocks have a mixed outlook.
In a difficult market, finding the best stocks to buy becomes even harder. UBS analyst Sean King recently initiated coverage on a range of beverage stocks, and he has a mixed 2019 outlook for the beverage business. King says UBS likes beverage stocks with positive near-term catalysts, superior growth trajectories, and track records of management execution. He also says the beverage business is undergoing critical transitions in consumer tastes, demographics, regulations and other areas. Here are nine beverage stocks to buy, hold and sell in 2019.
Buy: Molson Coors Brewing Co. (ticker: TAP)
Of all the beverage stocks under UBS coverage, King says Molson Coors has the highest upside. King says Molson Coors stock is approaching an inflection point in investor sentiment once management can stabilize volumes via targeted investing, adjusting the product portfolio and capitalizing on category momentum. He says once volumes stabilize, investors will shift focus to the company's group-leading 10 percent free cash flow yield. King says Molson's focus on hard seltzers and premium imports will drive 0.9 percent volume growth through 2021. UBS has a "buy" rating and $80 price target for TAP stock.
Buy: Keurig Dr. Pepper (KDP)
The only other beverage stock that King says has at least 20 percent upside is Keurig Dr. Pepper. According to King, KDP stock is currently priced for zero terminal revenue growth, an outlook that he says is overly pessimistic. Once Keurig and Dr. Pepper fully integrate, King says the pair will benefit from investor JAB Holding's international coffee assets, as well as Dr. Pepper's impressive elasticity. UBS is forecasting long-term revenue growth in the mid-single digits. UBS has a "buy" rating and $32 price target for KDP stock.
Hold: Constellation Brands (STZ)
King says Constellation has a number of near-term issues creating uncertainty for investors, including dilution related to its Canopy Growth Corp. (CGC) cannabis investment, inventory rebalancing, management turnover and a potential reduction of its wine portfolio. King says consensus earnings estimates on Wall Street are between 1 and 2 percent too high through fiscal 2021. However, he says Constellation may surprise the market with its beer growth and margin expansion. UBS is predicting a 1 percent annual slowdown in beer revenue growth in the near term. UBS has a "neutral" rating and $209 price target for STZ stock.
Hold: Coca-Cola European Partners (CCEP)
Coca-Cola European Partners stock was a top performer in the beverage group in 2018, gaining more than 17 percent despite uncertainty about sugar taxes in Europe. King says weather effects have obscured the true impact of the British sugar tax implemented back in April 2018, and Brexit could also pose an earnings risk as well. Despite a relatively steep valuation and geopolitical hurdles, King says CCEP should have no problem maintaining revenue growth in the low single digits and expanding its business to adjacent markets and categories. UBS has a "neutral" rating and $62 price target for CCEP stock.
Hold: PepsiCo (PEP)
King says PepsiCo investors need to keep expectations tempered heading into a new year with a new CEO. The company's product diversification and consistent track record make it a good defensive play in a shaky market, but King says PEP stock has little upside given its full valuation. Recent weakness in the North American beverage segment has been offset by strength in the Frito-Lay North America segment, but UBS is forecasting a return to sustainable annual revenue growth of 1.6 percent for North America through 2021. UBS has a "neutral" rating and $123 price target for PEP stock.
Hold: Coca-Cola Co. (KO)
Like PepsiCo, King says Coca-Cola is a solid defensive bet thanks to its global presence and its stable earnings. The company's refranchising project is nearing completion. However, King says Coca-Cola doesn't have much wiggle room in hitting its global growth targets, and the stock is currently trading above its historical valuation premium after a strong 2018. King says Coca-Cola may continue to outperform in the near term given the recent market rotation to defensive stocks, but its valuation will limit its upside. UBS had a "neutral" rating and $51 price target for KO stock.
Sell: National Beverage Corp. (FIZZ)
King says National Beverage stock is overvalued, trading at a forward earnings multiple of around 25. King says National Beverage must grow into its valuation, but UBS is projecting LaCroix revenue growth to decelerate to 14 percent in 2019, 11 percent in 2020 and 9 percent in 2021. In the meantime, King says Coca-Cola, PepsiCo and other competitors are aggressively investing in sparkling water. King says National Beverage deserves a "scarcity premium" for its unique products, but that premium is waning as competitors continue to innovate. UBS has a "sell" rating and $80 price target for FIZZ stock.
Sell: Boston Beer Company (SAM)
King says recent success in Boston Beer Company's business strategy will be easy for larger competitors to replicate. UBS is forecasting annual earnings per share declines of between 3 and 6 percent over the next three years as margins contract. King is expecting revenue growth to drop from 17 percent in 2018 to just 6 percent in 2020. Twisted Tea will be a reliable growth source in coming years, but King says Sam Adams revenue growth will decline by 1.4 percent annually. UBS has a "sell" rating and $228 price target for SAM stock.
Sell: Monster Beverage Corp. (MNST)
King says consensus earnings expectations for Monster are 3 percent too high in fiscal 2019 and 6 percent too high in fiscal 2020. He says margin headwinds will lead to consistent earnings misses over the next two years. As growth drops below the double-digit level in 2019 to the mid-single digits by fiscal 2021, King says the stock's earnings multiple will also contract. Despite Monster's relatively strong product elasticity, King says it will be difficult for the stock to maintain its current valuation. UBS has a "sell" rating and $48 price target for MNST stock.
The outlook for nine beverage stocks.
Here are buy, hold and sell recommendations from UBS on nine popular beverage stocks.
-- Buy: Molson Coors Brewing Co. (TAP)
-- Buy: Keurig Dr. Pepper (KDP)
-- Hold: Constellation Brands (STZ)
-- Hold: Coca-Cola European Partners (CCEP)
-- Hold: PepsiCo (PEP)
-- Hold: Coca-Cola Co. (KO)
-- Sell: National Beverage Corp. (FIZZ)
-- Sell: Boston Beer Company (SAM)
-- Sell: Monster Beverage Corp. (MNST)
