Analyst Jody Hong at Goldman Sachs upgraded both rival soda pop makers to buy from neutral last week, saying the beverage sector looks "increasingly attractive" right now relative to other consumer staples sectors.
"Beverage stocks now trade at or near parity to the food sector despite a historic premium and greater beverage company exposure to higher-growth emerging markets," the analyst wrote in a research note.
She said Coke and Pepsi, which together amount to close to 70% of the sector's market cap, are poised for 2007 earnings per share growth of 10% to 11%, offsetting any domestic weakness through their double-digit sales growth in emerging markets.
Coke shares are trading at a discount to other large cap staples even though there is evidence the core business is back on track, Ms. Hong said.
She raised her 12-month target price to $56 from $53, reflecting a multiple of 19 to 20 times projected earnings per share for 2008. She sees a 15% to 20% total return potential in a year in the shares, including a nearly 3% dividend yield.
PepsiCo shares have lagged the S&P 500 for most of the last year despite strong growth in its international division.
"We believe the lagging performance has created a good buying opportunity," she wrote, raising the 12-month price target to $73 from $71. That is reached based on a multiple of 19 to 20 times projected 2008 per share earnings estimates (a 17% potential return in a year).
KO-PEP 1-yr comparison chart: