Saturday, November 3, 2012

Choose Food Over Beverages: Goldman Picks Winners and Downgrades Coke

Beverage companies have been outperforming food companies in the past few months, as concerns about high grain prices have sunk numerous stocks. The divergence presents a buying opportunity, argues Goldman Sachs analyst Judy Hong.

“Recent concern over grain inflation has driven a further widening of Beverage and Food group multiples and high-multiple versus low multiple stocks within our Consumer Staples coverage. We recommend taking advantage of this valuation dispersion by increasing exposure to the Food sector and buying select ‘laggards,’” Hong wrote.

Hong upgraded the food sector to Buy, and downgraded beverages to Neutral.

“There has been a rotation into Beverages through much of 2012 with the group exhibiting stronger fundamentals versus Food, resulting in Beverage sector P/E valuation expanding to a 20% premium to the Food group after the two were near parity in 2011,” she wrote.

While companies with large grain exposure could feel pressure from the spike in prices in coming months, many companies that have lagged don’t depend as much on grain.

Hong upgraded Campbell Soup (CPB) to Buy from Sell as it stabilizes its soup portfolio and reinvests in its snack and beverage business, and JM Smucker (SJM) to Buy from Neutral� as it returns more cash to shareholders and expands margins.

Coca-Cola (KO), however, may have limited upside ahead, argues Hong.

“We expect KO will still deliver above-average fundamental performance, however, relative valuation is at peak levels and a tough macro backdrop and FX will limit EPS upside,” Hong wrote.

But what of Pepsico (PEP), which makes both snacks and beverages? Hong doesn’t say.

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