At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.
Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.
Coke or Pepsi? Both or neither?
What's your poison, investor? Coca-Cola (NYSE: KO ) or PepsiCo (NYSE: PEP ) ? Whichever soda stock you favor, it's time to belly up to the bar and pour yourself an ice-cold glass of shares.
At least, that's what the friendly analysts at Deutsche Bank think. On Friday, the banker announced it was initiating coverage of the three most popular names in pop. And while Dr Pepper Snapple (NYSE: DPS ) received only a "neutral" ranking from the banker, Deutsche thinks Coke is "it" ... and Pepsi is, too.
Admitting that "soft" U.S. and European economies combined with rising input costs are risks to the stocks, Deutsche still feels that Coke and Pepsi are worth buying. The analyst likes Coke's "harmonized" business model, "with company, bottlers and retail partners finally aligned to drive profitable growth in a rising cost environment." Meanwhile, at Pepsi, Deutsche sees "management ... being reshuffled," along with a possible unleashing of value as the company's "snacks and beverage combination is being questioned." The analyst says that each stock's "risk-adjusted valuation is reasonable."
Let's go to the tape
If anyone should know about this, it's Deutsche Bank. Ranked in the top 15% of investors we track on CAPS, Deutsche boasts a strong record of 56% accuracy in the beverages industry, including three buy recommendations made on Coke over the past four years -- all three of which beat the market.
And yet ... the more I look at Deutsche's recommendations, the more I wonder how an analyst who's been so right in the past could have gotten things so very wrong this time.
Valuation matters
"Risk-adjusted," Coke and Pepsi might well be considered "reasonable." I certainly can't argue against the strength of their brands, or their century-old staying power. (Coke has been around since at least 1886.) But I hardly think the stocks are bargains relative to other opportunities on the market today.
Consider: With forward earnings multiples of 16.5 and 13.5 respectively, both Coke and Pepsi cost significantly more than the average company on the Dow Jones Industrial Average (INDEX: ^DJI), where the going rate is closer to 11 times forward earnings. And while it's true that the soda companies offer strong dividend yields alongside their high sticker prices, the Dow overall pays a not-insubstantial 2.5% yield -- not much less than Coke's 2.7% or the 3.3% yield at Pepsi. Meanwhile, the firms' 8% to 9% projected earnings growth rates are right in line with the 9% average elsewhere on the Dow.
Long story short, while I like an ice-cold Coke as much as the next guy, and am positively addicted to Pepsi's Cheetos, I'll pass on their stocks.
Real investors drink beer
Seems to me, if you're looking for a hard and fast bargain, you're better off skipping the soft drinks and considering the beer sector instead. Anheuser-Busch Inbev (NYSE: BUD ) , for example, offers a stock price not that much worse than Coke's on a forward-multiple basis, alongside a growth rate nearly 50% faster. Scan farther north, and you'll find Molson Coors (NYSE: TAP ) offering a tasty PEG ratio of 1.0 (12 P/E ratio, 12% growth), and paying a tidy 3% dividend to boot. Best of all is the beverage stock of real patriots -- Boston Beer (NYSE: SAM ) .
At 23% projected annual growth, the Sam Adams parent tops the industry from growth prospects. Such bubbly growth is enough to make even the company's 21 P/E ratio look cheap. And as an added kicker, Sam stands nearly alone in the industry in boasting free cash flow superior to reported "GAAP" earnings, with the result being a truly cheap price-to-free cash flow ratio of just 17. And again -- this is on a 23% grower.
Foolish takeaway
If subpar growth rates and expensive stocks are your cup of tea, by all means, take Deutsche Bank's advice and invest in Coke or Pepsi. But if it's a bargain stock you're looking for, and one with enough growth potential to make the investment worth your while, give Boston Beer a look. Up 25% over the past year alone, Sam Adams remains the true beverage of patriots -- and value investors.
Here at The Motley Fool, we're not interested in investing in yesterday's news. We're on the lookout for consumer brands that will dominate the future. Read about our latest find in the Fool's new -- and free! -- report: "The Hottest IPO of 2011."
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