BMO Capital Upgrades Coca-Cola On 2016 Forecast

In a report published Monday, BMO Capital analyst Amit Sharma upgraded the rating on The Coca-Cola Co (NYSE: KO) to Outperform from Market Perform, while raising the price target to $48 from $44. The stock valuation and earnings expectations offer an attractive entry point for investors.

For the past three years, the company has been posting weak sales and earnings growth, which has led the stock to underperform the S&P 500. However, with Coca-Cola's operating performance expected to improve in 2016, the company is well positioned to regain its valuation premium, while beating the current consensus expectations.

"We expect KO's sales and EPS growth to approach long-term targets in 2016, driven by a combination of internal (e.g., stronger price/mix, higher media spending, greater focus on cost cutting, and a better-aligned incentive compensation structure) and external (e.g., macroeconomic environment, rational competition) drivers," Sharma said.

Contrary to popular perception, the company's carbonated soft drinks (CSD) segment is not witnessing a structural decline, given that its volumes and dollars are rising, driven by mid-single-digit growth in the developing and emerging markets.

While global growth in this segment has slowed down, the analyst believes that this deceleration, especially in the under-developed markets, can be attributed to a large degree to slower economic growth. This makes the analyst optimistic that growth will rebound as the economy improves.

"Moreover, higher media spending is enabling KO to gain market share in key CSD markets, positioning it to benefit disproportionately from the expected improvement in category consumption trends," the BMO Capital report stated.

In the developed markets, the analyst believes that Coca-Cola's focus on its price/mix would not only offset the sales weakness due to lower volumes, but also help increase margins, especially as the company starts to realize better bottom line benefits from its cost savings program in the beginning of 2017.