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06 Jul, Wednesday
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Bull Trader USA

The Ratings Game: Coca-Cola upgraded as anticipation grows that multibillion-dollar IRS tax case will come to a close

With a multibillion-dollar tax case possibly drawing to a close, Coca-Cola Co. was upgraded to buy from hold at CFRA.

Coca-Cola’s KO, +0.83% price target was lifted to $68 from $58.

The case has been lingering for more than a year, with a November 2020 decision stating that Coca-Cola owed about $3.4 billion in taxes from the years 2007 to 2009. There has been a risk that the company could owe even more as the tax examination continued.

“In our view, the pending resolution of its IRS tax case (a potential liability of $12B, or a 3.5% increase in its effective tax rate) will lift a major overhang, allowing investors to focus on Coca-Cola’s fundamentals and strong underlying momentum from the rebound in on-premise sales and robust pricing environment,” wrote Garrett Nelson in a CFRA note.

“While the outcome of the tax case remains difficult to handicap, the consequence of an adverse outcome should be largely offset by cash flow from improved concentrate sales and price/mix (+13% and +5%, respectively, in the first three quarters of ’21).”

Read: Cheerios parent General Mills expects supply chain disruptions to further impact price

JPMorgan, which downgraded Coca-Cola in January 2021 due to the case, upgraded the stock to overweight from neutral in December 2021, citing advantages such as top-line momentum and valuation, even as a final decision on the case looms.

JPMorgan has a $63 price target on Coca-Cola.

“[I]f the court rules in favor of the IRS, Coca-Cola will have 180 days to deposit part of the past potential liability in order to appeal (90 days to estimate liability and 90 days to appeal),” JPMorgan analysts wrote.

“We don’t believe this cash need will impact dividends or Coca-Cola’s debt rating… As such, we see limited downside potential for Coca-Cola shares at these levels, even if the litigation goes against Coca-Cola, and we think a resolution either positive or negative would remove this overhang.”

Coca-Cola stock has run up 20.3% over the last year while the Dow Jones Industrial Average DJIA, -1.07% has gained 18.1% for the period.

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