Warren Buffett, Coke’s largest shareholder, may disagree with analysts’ takes
It’s time to sell the stocks of Coca-Cola Co. and Procter & Gamble Co., according to analysts at Goldman Sachs Group Inc., who turned bearish on the blue-chip consumer staples companies after being neutral on them for over three years.
Goldman analyst Judy Hong downgraded Coke (KO) to sell, citing expectations that sales growth this year will be “subpar” relative to the global nonalcoholic beverage market, and that the dollar’s strength could restrain earnings growth. She recommended investors focus on beer and energy drink providers over soft drink sellers.
“We shift our preference back towards U.S.-centric names, as the recent strengthening of the [U.S. dollar] is causing -- once again -- a negative [earnings-per-share] revision cycle for multinationals and potential corporate tax reform proposals...are likely to disproportionately benefit higher tax-rate, U.S.-centric companies,” while weakness in emerging market currencies hurt demand in those countries,” Hong wrote in a note to clients.
The ICE U.S. Dollar Index (DXY) has surged about 7% since the end of September.
Coke’s stock, a component of the Dow Jones Industrial Average (DJIA) dropped 1% Monday. Hong cut her price target to $39, which is 5.6% below current levels, from $41.
Analyst Jason English downgraded Procter & Gamble (PG) to sell, citing concerns over valuation and the possibility that sales growth may have peaked.
He expects sales weakness will be apparent in P&G’s fiscal second-quarter report, which is due out in late January. “Comparisons stiffen, efficacy of its U.S. promotional surge is in question given failure to translate into share gains and we see sustained market share vulnerability as it pursues its megabrand strategy in an environment of market fragmentation as barriers to entry shrink,” English wrote.
He said the ratio of P&G’s stock price to earnings per share, which he said was at 21.6, was near the highest level in a decade, and is about 10% above its household and personal care peers.
The stock, also a Dow component, shed 0.7% Monday. English slashed his stock-price target to $77, which is 8.8% below current levels, from $86.
Coke’s stock has lost 0.5% over the past 12 months while P&G shares have gained 11.1%. In comparison, the Dow has run up 21.7% over the past year and the SPDR Consumer Staples Select Sector exchange-traded fund (XLP) has tacked on 5.5%.
Warren Buffett may disagree with Goldman
Billionaire value investor Warren Buffett may beg to differ with Goldman’s take. The latest regulatory filings show that Berkshire Hathaway Inc. (BRK.B, BRK.A) was Coke’s largest shareholder, owning 400 million shares, or 9.3% of the shares outstanding as of Sept. 30, 2016. Berkshire also owns a relatively small 315,400-share stake in P&G.
The price declines in Coke and P&G shares suggest Buffett may be losing about $168.2 million on his investments.
Berkshire is also a major shareholder of fellow Dow component Goldman (GS) with about 11 million shares, or 2.8% of the bank’s shares outstanding, as of Sept. 30, 2016. Goldman’s stock eased slid 0.8% Monday, which could be shaving about $22 million off Buffett’s investment.
Courtesy of MarketWatch