Bruce Kaser, editor of Cabot Undervalued Stocks Advisor, reviews two recommendations in the beverage space — one a leading soda maker and the other a leading brewer.

Coca-Cola (KO) reported an encouraging quarter. Revenues rose 16% from a year ago (better than the consensus estimate) as more economies around the world are recovering from the pandemic.

Earnings rose by 18% from a year ago and beat the consensus estimate by about 12% although higher marketing spending fractionally trimmed operating margins. Free cash flow was strong, as well. 

Management raised their full-year revenue, earnings and free cash flow guidance, and expressed confidence in continued momentum through 2022. The Coca-Cola story remains on track.

Also, the value of Coke’s partial ownership of a number of publicly traded companies (including its 19% stake in Monster Beverage) is somewhat hidden on the balance sheet, yet is worth about $23 billion, or 9% of Coke’s market value. This $5/share value provides additional cushion supporting our 64 price target.

While the valuation is not statistically cheap, the shares remain undervalued given the company’s future earning power and valuable franchise. KO shares offer an attractive 3.0% dividend yield.

Molson Coors Beverage Company (TAP) is one of the world’s largest beverage companies, producing the highly recognized Coors, Molson, Miller and Blue Moon brands as well as numerous local, craft and specialty beers.

Our thesis for this company is straight-forward — a reasonably stable company whose shares sell at an overly-discounted price. Its revenues are resilient, it produces generous cash flow and is reducing its debt. A new CEO is helping improve its operating efficiency and expand carefully into more growthier products. The company recently re-instated its dividend.

The stock remains cheap, particularly on an EV/EBITDA basis, or enterprise value/cash operating profits, where it trades at 8.1x estimated 2022 results, still among the lowest valuations in the consumer staples group and below other brewing companies.

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