The analysts at Morgan Stanley upgraded their stock rating for The Coca-Cola Co (KO) to Overweight with a $47 price target today. The shares of the beverage giant were slightly trading upward at $42.37 per share at the time of this writing, around 1:56 in the afternoon in New York.

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In a note to investors, Morgan Stanley analysts, Dara Mohsenian and Bob Doctor explained that they upgraded their stock rating for Coca-Cola because they believed that the recent strategy changes of the company will help improve its fundamentals and multiple expansions.

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The analysts said, “We believe that the traction from a number of significant and positive changes announced recently will drive outperformance in the stock over the next 12 months.”

 

Coca-Cola recently announced a $2 billion incremental cost-cutting program, a clear plan to re-franchise NA bottling and diversification through investments in MNST/GMCR.

The beverage giant also made changes in its incentive compensation and board composition. Coca-Cola also plans to shift its focus on pricing instead of volume.

They expected investors to price Coca-Cola’s improving fundamentals with rebounding topline growth (4% in 2015/2016e) on higher Coke pricing and KO market share gains.

The analysts added that Coke is returning to its HSD LT underlying EPS growth target in 2016 with greater cost cutting and increasing topline growth. Its NA refranchising is also driving higher returns/margins.

The analysts estimated that Coca-Cola will obtain a 4% organic sales growth with the implementation of greater pricing and a KO market share payback from higher marketing.

Mohsenian and Doctor noted that both factors are already playing a role in improving Coke US scanner data (+2% KO H2 US CSD sales growth vs flat H2 result and a 2% decline in 2013).

The analysts also believed that Coca-Cola’s incremental cost cutting combined with topline re-acceleration will enable the company to regain its HSD LT EPS growth targets (ex FX/bottling dilution) in 2016.

In addition, they are convinced that the consensus EPS estimates for Coca-Cola (ex FX) are “roughly in the right place.”

Furthermore, the analysts believed that Coca-Cola’s NA refranchising will boost shareholder value going forward. They expected the company to achieve higher returns/ margins in the future and they think that an LBO is unlikely (see above chart).

Mohsenian and Doctor said their $47 price target for the shares of Coca-Cola was based on 22 times 2016e EPS, and it is a slight discount to the average multiple price target they used for the company’s mega cap peers.

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