KDP - Beverages are a safe bet in consumer discretionary amid macro concerns - Morgan Stanley

Morgan Stanley sees beverages as a “preferred sector” for investors to target as a worsening economic backdrop threatens consumer spending broadly.

In a research note outlining the implications of a consumer trade-down, a team of analysts at the bank named beverages among the safest places for investors to put money due to the pricing power, post-COVID recovery, and the benign competitive dynamics of the industry. Overall, the team opined that pricing power among beverage companies are “clearly superior to CPG peers” while sales are set to recover from both increased stay-at-home demand and an improving supply chain.

Additionally, the “long-term secular topline growth” of Buy-rated names like Monster Beverage

Corporation ( NASDAQ: MNST ), Coca-Cola ( NYSE: KO ), PepsiCo ( NASDAQ: PEP ), and Constellation Brands ( NYSE: STZ ) keep the team encouraged on the prospects for the space. In each case, the team noted its estimates are above the Wall Street consensus ahead of anticipated earnings releases for both Monster and Coca Cola in the coming weeks.

“Importantly, this topline upside and greater beverage pricing growth is not just short-term, but also medium-to-long term with greater pricing power and limited volume demand elasticity a multiyear point, as cost pressures are severe enough they will require multiple years of pricing, and catch-up vs. an unfavorable cost vs. pricing gap from 2020/2021,” the research added.

To be sure, the team remained more cautious on Molson Coors ( TAP ), Keurig Dr. Pepper ( KDP ), and Zevia ( ZVIA ). The research suggested these names lacked the same secular growth drivers that motivate Buy-equivalent ratings for their peers. Lastly, Brown-Forman ( BF.A ) ( BF.B ) was listed at a Sell-equivalent rating, the sole beverage company in Morgan Stanley’s coverage to be rated as such.

Read more on the earnings expectations for Coca-Cola as it prepares to report on Tuesday .

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