Jefferies comments on Coca-Cola capturing KFC from Pepsi

Investing.com - Jefferies maintains a Buy rating on Coca-Cola (NYSE: KO) and a Hold rating on PepsiCo (NASDAQ: PEP) following KFC's decision to switch its beverage supplier from Pepsi to Coke in the U.S. market. The research firm says the move was unexpected and follows Marriott's similar switch to Coca-Cola a few months earlier after a three-decade relationship with Pepsi.

The direct volume impact appears limited, as KFC represents approximately 1% of quick-service restaurant market share. Based on KFC U.S. system-wide sales of $4.7 billion and an estimated beverage mix of 8-12%, the switch represents $375 million to $560 million in sales. Jefferies notes foodservice losses do not reduce system leverage in the same way as lost retail distribution.

The firm says the account changes raise questions about whether other historically exclusive relationships are now open to competition. Pepsi recently won Subway away from Coke, while McDonald's selected Red Bull as its energy drink partner instead of Coke's Monster brand, indicating the foodservice channel has become less captive.

Jefferies says the bigger concern for Pepsi is lost brand interaction and public perception, as restaurants, hotels and foodservice chains remain important locations where consumers engage with beverage brands. The firm notes Coca-Cola has shown momentum and has been aggressive in pursuing away-from-home opportunities.

PepsiCo currently trades at 15 times forward two-year earnings per share, five turns below its five-year average. Jefferies says the KFC deal does not materially affect financial projections but could pressure the valuation multiple due to perception issues.

You May Also Be Interested In

• Jefferies Highlights Top Mid-Cap Biotech Stocks Ahead of Earnings
• Morgan Stanley Upgrades Moog (MOG-A) to Overweight
• Moody's Corp (MCO) PT Lowered to $560 at Jefferies