KDP - Keurig Dr Pepper: The Winners Do Not Take It All
2024-05-26 09:01:57 ET
Summary
- Keurig Dr Pepper trades around fair value with its quality income statement fundamentals and quality brand portfolio.
- Warren Buffett once acknowledged the quality of KDP, even when not dominating the beverage industry. The winners (Coke, Pepsi) don’t take it all.
- Risks include headwinds in the Coffee segment, the need for debt financing and high goodwill.
- I am taking a holistic and bird's-eye long-term perspective rather than heavily focusing on short-term earnings releases.
- I typically rate Hold/neutral, even when my inclination is bullish or bearish. Rating systems don't consider time horizons or investment strategies. My articles aim to inform, not to make decisions.
With my portfolio, I have historically achieved an annual return that is market-average, but with extraordinarily low volatility of under 10% annualized and a portfolio beta in the range of 0.7 – 0.8. This translates to a risk-adjusted outperformance, which can be achieved and interpreted in several ways. For me, this means at least market-average performance with significantly below-average risk – a suitable metric for this would be the Sharpe ratio. One reason for this portfolio result is my focus on four pillars: Technology, Health Care, Entertainment, and Consumer Staples, each contributing different factors to the overall result (i.e. growth vs. stability). With this article, I want to lead you through the latter pillar by evaluating Keurig Dr Pepper (KDP) as a potential addition to my portfolio, which currently contains The Coca-Cola Company (KO) and PepsiCo (PEP). I am drawn to those types of companies because of their straightforward business models and long-term durability and stability. My analysis is structured as follows:
- Dissecting the quality segment structure, growth and profitability of KDP over time.
- Demonstrating that despite always being in the shadow of major players, KDP proves that the industry offers space for multiple quality providers.
- Assessing the extent to which headwinds in coffee, the somewhat weakened balance sheet and weight-loss drugs pose relevant risks.
- I round this off by comparing valuation parameters of KDP with those of industry peers.