stock is falling for a fourth day in a row, following the beverage giant’s fourth consecutive downgrade.
On Thursday, J.P. Morgan analyst Andrea Teixeira cut her rating on Coca-Cola (ticker: KO) to Neutral from Overweight, while maintaining a $50 price target.
Some analysts have been focused on a slower-than-expected pandemic recovery for Coke—which gets a good deal of its business from people buying products away from home—while others have focused on its potential tax woes. Teixeira is in the latter camp, writing that her downgrade stems from what she sees as increased risk that Coke loses its current tax dispute with the Internal Revenue Service.
In November, the U.S. Tax Court ruled against Coke, a decision that means the company faces a $3.3 billion tax bill related to issues from 2007 to 2009. As Teixeira puts it, the problem stems from a dispute about whether or not the formula the parties previously agreed to use overestimates Coke’s profits from operations abroad, when compared with its bottlers.
She still believes that “Coke has a strong case,” but warns that there’s the risk that this tax liability could “more than triple” if the IRS applies the same tax treatment for years beyond 2009. That would equate to about $1 billion a year for seven years, after which it would be lower.
Teixeira was heartened to see Coke hire former U.S. federal judge and
(BA) general counsel J. Michael Luttig as a counselor and special advisor, but while this is a positive step, it also “confirms that the risk is rising, and therefore we are taking a pause.”
In the longer term, Teixeira writes that she still likes Coke’s fundamentals and believes the company will emerge stronger from the Covid-19 pandemic. Yet she’s concerned that the tax overhang will be a headwind for a good part of 2021, and the company may be forced to put the $3.3 billion in escrow.
Coke stock was down 0.8%, at $50.14, in recent trading. The
was up 1.5%. According to FactSet, less than 60% of analysts covering Coke are now bullish on the stock; that compares to nearly three-quarters who were in December.
Barron’s has been more upbeat about Coke’s prospects.
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