RBC Capital Markets has a new favorite mega-cap stock: Coca-Cola.
Coke’s stock, which briefly touched an all-time high on Thursday morning, looks set to generate 20 percent returns over the next 12 months, according to Nik Modi, RBC managing director covering tobacco, household products and beverages.
“The market is underestimating Coke’s volume growth potential over the next couple of years,” Modi said. “Their refranchising is going to help accelerate volume, so in the markets that have already been refranchised, you’re seeing volumes turn to double-digit growth.”
Coke’s growth, if realized, would buck an industry trend of consumers shunning sugary drinks in favor of more healthy choices. In 2015, a report showed soda sales have declined for 10 years in a row. Putting further pressure on beverage companies, a number of countries — looking to fight growing obesity rates — are considering taxing sugary drinks.
But RBC is still optimistic. The firm has set a target price of $51 per share for Coke, partly because it doesn’t believe consumers are ready to ditch sodas. It was trading at $44.85 Thursday afternoon.
“The reason the carbonated soft drink category has declined is not because people are walking away from the category,” Modi said. “Think about Monster, Red Bull, Mountain Dew. The last time I checked, those are all sodas.”
Coke’s real problem has been weak marketing, Modi said. But with the company’s recent rebranding efforts — which have included updating its slogan and notching a new brand ambassador — Modi believes Coke is poised for a surge in growth.
“You could take a farmer out of Egypt and the queen of England and put them in the same room, and the one thing they’ll have in common is that brand, because they’ve both probably consumed it at some point in their lives,” he said.