Dr Pepper Snapple (DPS) and Church & Dwight (CHD) have many things in common, but Dr. Pepper's valuation is far more attractive, according to Morgan Stanley. Moreover, the fundamentals of the soda company are improving while those of the personal care product maker are deteriorating, stated the firm, which advocates a pair trade of going long Dr. Pepper and shorting Church & Dwight. In conjunction with this call, it upgraded Dr. Pepper to Overweight and cut Church & Dwight to Underweight, its equivalent of a sell rating.

SIMILARITIES: Both companies are mid-sized and "skewed" towards the U.S., wrote Morgan Stanley analyst Dara Mohsenian. Both have "strong management teams" and have "prospered in low growth product categories against much larger competitors," the analyst stated. He also believes that their "fundamentals" are "fairly similar."

VALUATION: Church & Dwight is trading at a 35% premium to Dr Pepper based on 2018 price to earnings ratios, according to Mohsenian. The market is pricing in an excessive amount of concern over Dr. Pepper's acquisition of Bai and investors have not priced in the deteriorating fundamentals of Church & Dwight and the improving fundamentals of Dr. Pepper, the analyst stated. Furthermore, the market is giving Church & Dwight an excessive consolidation premium based on Kraft Heinz's (KHC) failed bid for Unilever (UL, UN), Mohsenian argued.

FUNDAMENTALS: Dr. Pepper's organic sales growth accelerated to about 4% in 2015-2016 from about 1% in 2013-2014, Mohsenian noted. The company's competitive position has improved, as Coca-Cola (KO) and PepsiCo (PEP) have not invested a great deal in their soda businesses, he explained. Conversely, Church & Dwight's organic growth dropped to 3% in 2016, versus its previous five year average of nearly 4%, he stated. A number of "larger, more well-funded competitors," led by Procter & Gamble (PG), are increasing their marketing spending in the U.S, the analyst reported. Additionally, Church & Dwight will probably be hurt by retailers' efforts to pay their suppliers less amid intensifying competition, noted Mohsenian.

PRICE TARGETS: The analyst raised his price target on Dr Pepper Snapple to $104 from $103 and cut his price target on Church & Dwight to $49 from $51.

PRICE ACTION: In early trading, Church & Dwight lost 1% to $49.80 and Dr. Pepper gained about 1% to $91.87.