Bigger may not always be better when it comes to beverage companies.
Goldman Sachs analysts, in a note on Monday, downgraded shares of Coca-Cola to “sell” while upgrading Dr Pepper Snapple to “neutral,” saying that the policy winds of 2017 may blow more favourably for US-centric companies than multinational players.
A key headwind facing multinationals such as Coca-Cola in 2017 is the strong US dollar, which recently touched a 14-year high.
While it has since slightly receded, continued strength for the greenback could pose inflationary and foreign-exchange challenges for US-based companies that see a significant percentage of sales in non-US markets, particularly key emerging markets such as Latin America and China.
Coca-Cola and other multinationals may also be poised to benefit less from promised corporate tax reform under the incoming Donald Trump administration than US-centric companies that pay a higher domestic tax rate, Goldman analysts noted.
In a separate note on Monday, it cited the same factor, among others, in kicking its rating of the shares of fellow multinational Procter & Gamble down to “sell”.
However, there may be some upside if the administration can incentivise companies to bring foreign profits into the US, the note said.
Some of the specific challenges facing Coca-Cola, which has seen its shares dip 0.5 per cent over the past 12 months, include expected slower organic sales growth, the need to implement some structural reforms and a relative dearth of meaningful potential near-term strategic options, such as value-added M&A, the note said.
While incoming chief executive James Quincey was well-respected by investors during his tenure as the company’s chief operating officer, he has “thus far pursued incremental rather than transformative change”, wrote analyst Judy Hong, when “a shift in a more dramatic ‘game-changing’ direction . . . would be a positive”.
By contrast, Dr Pepper Snapple, a fellow purveyor of fizzy drinks, could be better positioned to reap 2017’s gains with its core focus on the North American market and its recent acquisition of Bai brands, which specialises in low calorie non-carbonated beverages and is positioned to see sales double over the next two years, Goldman analysts said.
Dr Pepper Snapple has also benefited from sales growth of its Canada Dry ginger ale and the ability of its eponymous Dr Pepper soft drink to hang on to its market share amid fierce competition for shelf space.
Elsewhere, energy was the biggest sector decliner on the S&P 500, falling 1.3 per cent. The sell-off was driven by a 2.6 per cent drop in West Texas Intermediate, the US oil marker, to $52.60 a barrel and a 2.6 per cent slide in global benchmark, Brent, to $55.61 a barrel.
Robert Yawger, director of the futures division at Mizuho Securities, partly attributed it to the US’s move to sell 8m barrels of crude from the Strategic Petroleum Reserve.
“On its own, that volume may seem like a spit in the barrel. Insignificant as far as market fundamentals are concerned,” he said. “However, sometimes the correlation between market fundamentals and market psychology can be shaky at best . . . like right now.”
Energy stocks led the S&P 500 last year with a near-24 per cent rise. However, concerns about planned 2017 production cuts and a possible rise in US output have pushed the sector down 0.7 per cent so far this year.
By midday Monday, US stocks were struggling to regain last week’s momentum. The Dow Jones Industrial Average fell 0.2 per cent to 19,920.83, after nearly breaking the 20,000 mark on Friday, while the S&P 500 was down 0.2 per cent to 2,272.60. The Nasdaq Composite countered the selling trend by rising 0.2 per cent to 5,532.73.