Household Names JPMorgan Initiated Ratings On This Week

JPMorgan initiated coverage of U.S. beverages and household & personal care products companies Tuesday. The firm said its top picks are the ones offering growth at reasonable price, namely Estee Lauder Companies Inc (NYSE: EL), Newell Brands Inc (NYSE: NWL), Monster Beverage Corporation (NASDAQ: MNST) and PepsiCo, Inc. (NYSE: PEP).

Analyst Andrea Teixeira, however, is Underweight on Coty Inc (NYSE: COTY), given acquisition, integration challenges. The analyst noted that the sectors have been unusually volatile.

Key Drivers Of he Industry

• Increased M&A and activism with two announcements: 3G/Buffett bid for Unilever plc (ADR) (NYSE: UL) as well as Trian's $3.5 billion investment in Procter & Gamble Co (NYSE: PG) leading to a sector dislocation, re-rating but also creating GARP opportunities
• Key categories (laundry, toothpaste, litter) deceleration, decreased mall traffic: Leading to destocking and increased promotional activity at key large boxes, particularly Wal-Mart Stores Inc (NYSE: WMT)
• Increased relevance of non-tracked channels: Including e-commerce, specialty retailers, Costco Wholesale Corporation (NASDAQ: COST) limiting the Street's ability to use Nielsen data as a leading indicator into earnings.
• Potential tax reform favoring U.S.-centric companies.

Elaborating on the Overweighted stocks, JPMorgan gave reasons for its preference for each of them.

Justification On The Bullish Theses

Este Lauder: Continued strong top-line growth, new shelves at Specialty offsetting declines at department stores, high ROE and attractive valuation.

Monster Beverage: Additional growth stemming from the use of The Coca-Cola Co (NYSE: KO), continued category share gains and U.S. growth boosted by product innovation.

Pepsi: Solid growth in snack business, market share gains by non-carbonated beverages and opportunity to improve beverages execution with snacks experience.

Newell: White space opportunities, high return on marketing investments, cheap valuation.

Worsening Competitive Environment Seen For Neutral-Rated Stocks

The firm clarified that it is Neutral on stocks exposed to decelerating and increasingly promotional categories. According to the firm, the competitive environment has worsened for Colgate-Palmolive Company (NYSE: CL), Clorox Co (NYSE: CLX), Kimberly Clark Corp (NYSE: KMB) and Church & Dwight Co., Inc. (NYSE: CHD). This is because management teams have been very vocal about falling sales in key categories such as laundry, litter and grooming.

Tax Reforms Overestimated

JPMorgan sees good entry points for Newell, Constellation Brands, Inc. (NYSE: STZ) and Becle SAB de CV NPV (OTC: BCCLF) , as it feels tax reforms, though likely to be significant, were being overly estimated.

Ratings/Price Targets

• Becle (Jose Cuervo) — Overweight/ 36 Mexican Peso.
• Church & Dwight — Neutral/$53.
• Clorox — Neutral/$136.
• Coca-Cola — Neutral/$43.
• Colgate-Palmolive — Neutral/$77.
• Constellation Brands — Overweight/$183.
• Coty — Underweight/$16.
• Estee Lauder — Overweight/$100.
• Kimberly Clark — Neutral/$139.
• Molson Coors Brewing Co (NYSE: TAP) — Neutral/$105.
• Monster Beverages — Overweight/$56.
• Newell Brands — Overweight/$63.
• PepsiCo — Overweight/$125.
• Procter & Gamble — Neutral/$98.

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