KDP - Wedbush voices bullishness on Keurig Dr. Pepper caution on Monster Beverage

Wedbush said it sees opportunity in snacks and soda, less so on energy drinks, in a note assessing non-alcoholic beverage names on Tuesday.

Equity analyst Gerald Pascarelli explained that low price points in the soda, snack, and coffee industries, which have few substitutes, generally hold up well in recessionary environments. Additionally, he expects a normalization in pricing to be offset by concurrent stabilization in commodity prices, pointing to aluminum pricing trends specifically. Overall, Pascarelli expects market leaders to improve profitability even if sales pull back into 2023.

“Based on the current macro environment, pricing trends and overall consumer demand, we are favoring companies with diverse portfolios across the non-alcoholic beverage sector and ascribe Outperform ratings to [Keurig Dr. Pepper ( NASDAQ: KDP ), Coca Cola ( KO ) and PepsiCo ( PEP ),” Pescaralli said on Tuesday. “We are more cautious on the energy drinks category given the macro backdrop, a relative lack of pricing power, potential for near-term disruption, and channel mix. We rate [Monster Beverage] ( MNST ) and [Celsius Holdings] ( CELH ) as Neutral.”

He added that Keurig Dr. Pepper is the firm’s “top pick”, citing strong positioning in both carbonated beverages and juice, as well as improving dynamics in coffee.

“KDP is our Top Pick in non-alcoholic beverages, as we view them as the most underappreciated to core peers based on relative valuation despite the same long-term targets,” Pascarelli said. “With capacity constraints now behind them in coffee, we expect revenue and profitability to accelerate with a continued benefit from the hybrid work model.”

He added that he "likes the setup" for the stock's upcoming earnings results into 2023. A $43 price target was assigned to Keurig Dr. Pepper ( KDP ) shares alongside the Outperform rating.

For the more cautious take on energy drink names, margin and valuation issues were highlighted as key areas of concern.

“While MNST continues to drive strong topline growth and carries a very clean balance sheet, profitability concerns remain an overhang,” he wrote. “Potential for near-term disruption due to the distributor transition is also a key risk that could weigh on the multiple at these levels.”

For Celsius Holdings ( CELH ), the recent run-up for the stock was cited as reason enough to remain on the sidelines for the near term.

“CELH has a long runway to increase its market position, which now seems more likely with their products headed into the PepsiCo ( PEP ) distribution system,” Pascarelli acknowledged. “While there is a lot to like about the story, valuation keeps us on the sidelines, as shares have more than doubled since early May suggesting most of the event driven upside is already priced into the stock.”

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