KDP - Keurig Dr Pepper: Tapping Into The Converging Beverage Market

2023-10-09 23:46:36 ET

Summary

• The merger between Keurig and Dr Pepper has significantly improved the company's market share, sales performance, and stock value.
• Keurig Dr Pepper has demonstrated resilience and raised its sales outlook for 2023, maintaining profitability and reducing debt.
• KDP has identified growth opportunities in expanding its product offerings and has shown impressive revenue growth compared to competitors.

The merger between a coffee-making and a soda-making company in 2018, which formed Keurig Dr Pepper ( KDP ), has proven to be a strategic move that substantially enhanced the company's market share, elevated its sales performance, and boosted its stock value. Investors have reaped impressive returns over the past five years, totalling 33.29%. As the beverage industry continues to blur lines, the company has benefitted through innovative beverages and broadened distribution channels from this strategic move.

While it's important to note a recent decline in sales volume and the link between increased revenue and rising prices due to inflation, as well as the stock's year-to-date loss indicating some negative market sentiment, several positive factors should be considered. Amidst the current market uncertainty, Keurig Dr Pepper has demonstrated resilience by raising its sales outlook for 2023. The company maintains profitability, diligently reduces debt, raised its dividend, and makes substantial investments to enhance its distribution and product offerings through acquisitions and partnerships such as the Nutrabolt collaboration . Furthermore, Keurig Dr Pepper possesses growth potential in both its hot and cold beverages segments. Given these promising indicators, investors should adopt a bullish stance on this stock.

Company overview

In a significant merger five years ago, Dr Pepper, Snapple, and Keurig Green Mountain came together to form Keurig Dr Pepper. The company currently operates across three distinct segments: U.S. Refreshment Beverages, U.S. Coffee, and International. Among these, the Refreshment Beverages segment stands out as the primary revenue driver. Notably, Keurig Dr Pepper ranks as the fourteenth largest beverage company worldwide in terms of market capitalisation.

Keurig Dr Pepper is strategically focused on achieving organic growth through three primary pillars. Firstly, it aims to foster growth in its core brands. Secondly, it seeks to enhance its portfolio and optimise omnichannel strategies. Thirdly, it concentrates on refining its selling and distribution systems. Looking ahead to the next five years, the company is poised to capitalise on the evolving landscape of the beverage industry, with plans to bolster its core business and diversify its brand portfolio. Keurig Dr Pepper has identified growth opportunities in expanding its product offerings, particularly in segments such as energy drinks, ready-to-drink coffee, and sports hydration.

Projections for FY 2023 anticipate sales growth of 5-6%, surpassing the earlier 5% estimate, while adjusted earnings are expected to increase by 6-7%. Investors can gain further insights during the Q3 2023 Earnings Conference call scheduled for Thursday, October 26 .

Financials and valuation

Keurig Dr Pepper has demonstrated growth in both its revenue and profitability over the past half-decade. Notably, the company has bolstered its financial position, consistently generated positive levered free cash flow, and recently augmented its dividend payouts. Although the company has encountered a decline in sales volume, it has effectively leveraged its robust core brand portfolio, harnessed the power of premiumisation, and capitalised on expansion opportunities in segments like premium water. This is evident in the company's impressive revenue, which has surged to a trailing twelve-month total of $14.57 billion.

When we assess Keurig Dr Pepper's growth trajectory in comparison to several major industry players like The Coca-Cola Company ( KO ), PepsiCo ( PEP ), Anheuser-Busch InBev ( BUD ), Starbucks ( SBUX ), and Monster Beverage (MNST), the company's performance stands out prominently. Over the past five years, Keurig Dr Pepper has achieved an impressive compound annual growth rate ((CAGR)) in revenue, recording a robust 24.60%. Furthermore, its net income has exhibited substantial double-digit growth at 11.26%, surpassing the performance of key competitors such as PepsiCo, Coca-Cola, and Monster.

The company's net income, currently at TTM $1.6 billion, has displayed a generally upward trajectory, with the exception of a decline in one FY.

It's evident that the company consistently generates positive levered free cash flow over the past five years, although the TTM figure of $1.55 billion is slightly lower than that of FY 2022. This surplus cash provides the company with opportunities for reinvestment in its business, rewarding investors, and reducing its debt load.

The company has successfully reduced its debt load over the past five years, although it still maintains a relatively high level of debt. Below are details regarding the upcoming debt maturities that the business needs to address. It's worth noting that the company initiated a $4 billion revolving credit agreement in 2022. The company's current ratio stands at 0.39, suggesting potential challenges in meeting its short-term obligations.

The company has recently raised its dividend by 7.5%, resulting in a forward dividend yield of 2.86% with a payout ratio of 46.51%.

The stock currently holds a Buy rating of 3.77 from Wall Street analysts, and it is trading significantly below its average price target of $38.39, presenting a potential 27.67% upside. When comparing the FWD price-to-earnings ratio to its larger industry peers, the company appears undervalued, boasting a ratio of 19.53. Additionally, the stock's price-to-book ratio stands at 1.66, which is favourable compared to its peers. Given the company's expectations for revenue growth in FY 2023 and its promising long-term prospects in both hot and cold beverages, this could present an attractive investment opportunity, particularly as the stock has recently experienced a decline of 15.36% value year to date.

Risks

Although Keurig Dr Pepper has outlined a positive forecast for FY 2023, there are risks we should be cautious of including the potential impact of an economic recession in 2024, ongoing inflationary pressures affecting pricing strategies, disruptions in the supply chain, stiff competition in the coffee market, shifts in consumer preferences and health trends, interest rate volatility affecting borrowing costs, execution risks in mergers and acquisitions, succession planning concerns, changing market and consumer trends, regulatory and environmental factors, potential brand and reputation risks, and geopolitical uncertainties associated with international operations. These could all negatively impact the growth of the business.

Final thoughts

Keurig Dr Pepper has revised its sales projections for FY 2023, demonstrating consistent top-line growth since its merger five years ago. While it's important to remain vigilant about potential economic downturns and persistent inflationary pressures, the company has showcased its capacity to expand market presence, introduce innovative products, and foster growth through organic and inorganic means. With the promise of long-term advantages and a presently appealing stock value, coupled with a more favourable price-to-earnings ratio compared to some of its larger counterparts, investors might consider adopting a bullish perspective on this stock.

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