Is Keurig Dr Pepper’s Stock Undervalued?

by Trefis Team
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Upside
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Market
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Trefis
KDP
Keurig Dr Pepper
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Based on its current market price and future growth prospects, Keurig Dr Pepper (NYSE: KDP) looks undervalued. Trefis has a price estimate of $31 per share for KDP’s stock, which is higher than its current market price of $28.74 as on January 2, 2020. This reflects an upside of about 8% from its current level.

To understand the major factors that are driving our price estimate for KDP’s stock, view the Trefis interactive dashboard – Keurig Dr Pepper Valuation: Expensive or Cheap? – and alter the key assumptions to arrive at your own estimate for the company’s stock price.

Company Overview

  • Keurig Dr Pepper (KDP) was formed following the merger of Dr Pepper Snapple and Maple Holdings Parent Corp. (which owned Keurig) in July 2018.
  • KDP is a leading beverage company in North America, which offers Beverage Concentrates, Packaged Beverages, and Coffee brewers.

Estimating Total Revenues

  • KDP’s Total Revenue is expected to maintain its rising trend, with the company projected to add close to $0.4 billion to its revenue base in the next 2 years.
  • For the full year, we expect revenue to increase by about 1.3% from $11 billion in 2018 to $11.2 billion in 2019, and further by 2.3% to $11.4 billion in 2020, benefiting from the launch of new varieties.
  • KDP is expected to capitalize on the launch of Diet Canada Dry Ginger Ale & Lemonade and the introduction of Canada Dry Ginger Ale and Orangeade, both of which will be supported by marketing investment.
  • The company has also stuck to its strategy of partnerships, which is a key element of its Coffee Systems business.
  • KDP recently partnered with Tim Hortons, the iconic coffee brand in Canada, which was previously unlicensed, and Panera, the well-regarded bakery cafe brand in the U.S.

To understand how each operating segment has performed and what is the outlook, view our dashboard analysis.

Estimating Net Income

  • Net Income decreased from $1.4 billion in 2017 to $1.1 Billion in 2018. The decrease in margins was led by merger-related costs.
  • Net income margin is expected to increase from 10.1% in 2018 to about 15% in 2019, and further to 16.5% in 2020, driven by expected merger synergies of $200 million in 2019 along with lower advertising and marketing expenditure.
  • Additionally, the absence of merger-related costs, which ate into the margins of 2018, coupled with increasing productivity gains, is expected to provide a further fillip to profitability.

Estimating Earnings Per Share

  • EPS decreased from $1.03 per share in 2017 to $0.79 per share in 2018, driven by a drop in net income and stable share count.
  • We estimate EPS to be $1.34 in 2020.
  • EPS growth from 2018 can be attributed to higher Net Income and a flat share count.

Share Price Estimation

  • As per Keurig Dr Pepper’s Valuation by Trefis, we have a price estimate of $31 per share for KDP’s stock.
  • The stock price estimate is arrived using the discounted cash flow valuation technique, which you can find in Keurig Dr Pepper’s detailed financial model here.
  • Based on projected EPS of $1.34 per share and stock price estimate of $31 per share, KDP’s forward price-to-earnings (P/E) multiple stands at 23x.

To understand how KDP’s P/E multiple compares with its major peers, view our interactive dashboard.

 

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