The weekend has arrived, and on Wall Street, it's time to sit back, relax, and enjoy a nice cool...beverage stock. This morning, analysts at Credit Suisse surveyed a few of their favorites, and announced they're initiating coverage of PepsiCo (NYSE:PEP) at outperform (i.e., buy), and Monster Beverage (NASDAQ:MNST) likewise, but giving Coca-Cola (NYSE:KO) no more than a neutral rating.
Would you like to know why? Then you've come to the right place. Here are three things you need to know about Credit Suisse's new recommendations.
1. PepsiCo gets a buy rating, but...
Our survey begins with PepsiCo, the soda giant known not just for its pop, but for its Frito-Lay line of salty snacks as well. Credit Suisse rates PepsiCo an outperform, and has assigned the stock a $121 price target. With PepsiCo stock currently trading for $105 and change, that promises as much as a 15% profit for new buyers -- plus a 2.9% dividend yield.
What gets Credit Suisse so excited about Pepsi stock? It's not the valuation. At 30 times earnings, Pepsi stock is hardly cheap. Moreover, Credit Suisse admits that its own "sales and EPS estimates are generally in-line with the consensus" -- so Pepsi's P/E isn't really any cheaper than it looks.
It's not the growth rate, either. Most analysts doubt Pepsi can grow much faster than 7% long-term, and while Credit Suisse says Pepsi is growing its "noncarbonated beverages" business (i.e., water) well, it's probably not well enough to bump the growth rate well into the double digits. Rather, Credit Suisse simply likes Pepsi's staying power as a franchise, arguing that "we think the market is not giving the company due credit for the marketing and financial strength of the Frito-Lay franchise" and Pepsi's ability to keep earning steadily for years to come.
2. ...Coca-Cola doesn't
Moving on to archrival Coca-Cola, Credit Suisse isn't nearly as enthralled with this one. Quoted on StreetInsider.com this morning, the analyst calls Coke "one of the top three most valuable brands in the world and one of the best operators out there." However, Credit Suisse worries that earnings over the next couple years "will be bumpy" and predicts "the shares will remain range-bound over the coming 12 months as the company implements the organizational and operational changes it is currently undertaking."
Coke stock sells for $42 today, and Credit Suisse doesn't see it growing much past $44 over the coming year. Accordingly, Coke gets a neutral rating.
3. Monster Beverage will eat Coke's lunch (and take its milk money)
Curiously, though, Coke is key to Credit Suisse's recommendation of a completely different stock: Monster Beverage. By piggybacking on "the Coke distribution system," Credit Suisse predicts that Monster will "broaden its range and expand geographically." Credit Suisse thinks Monster's "strong growth [will] persist and even accelerate ... in the coming years" as the company capitalizes on its products' popularity with "Millennial consumers."
The most important thing: Valuation
How good could things get for Monster stock? Most analysts who follow Monster see the company growing earnings at 21% annually over the next five years, but Credit Suisse says it adds 2% more worth of annual growth rate from 2018 on out based on "aggressive assumptions around innovation launches and increased distribution in international markets."
Of course, even a 23% growth rate may be too little to justify Monster's monstrous valuation of 46 times earnings. More worrisome still, Monster Beverage suffered a big drop in free cash flow last year (generating just $0.31 in real cash profits per $1 in reported income), and its free cash flow has actually turned negative over the past 12 months. Those numbers might be enough to give any investor pause, even if the stock's P/E ratio didn't show it to be significantly overvalued already.
Then again, with PepsiCo stock valued at 30 times earnings, and Coca-Cola stock at 24 times earnings -- both on prospects for no more than single-digit growth over the next five years -- maybe Credit Suisse thinks it's worthwhile paying up for greater growth at Monster.
My only advice: Paying up is fine. But try not to overpay.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he currently ranks No. 280 out of more than 75,000 rated members.
The Motley Fool owns shares of and recommends Monster Beverage and PepsiCo. The Motley Fool recommends Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.