Does Keurig Dr Pepper Look Expensive At $27 Given Its Resilience To COVID-19?

After only a 6.5% decline in Keurig Dr Pepper’s (NYSE: KDP) stock since the beginning of 2020, at the current price of $27 per share, we believe KDP’s stock has a very limited upside, with the stock likely to remain around the current level considering the impact of the ongoing coronavirus crisis. The current stock price of $27 is, in fact, higher than the stock price of $25 at the end of 2018. We believe that even after the coronavirus crisis, KDP’s stock is likely to underperform its peers, like Coca-Cola, and the market, that have seen a sharper drop in stock price in 2020. Our dashboard What Factors Drove 8.4% Change In Keurig Dr Pepper Stock Between 2018 And Now? provides the key numbers behind our thinking and we explain more below.

Some of the stock price rise from $25 at the end of 2018 to $29 at the end of 2019 is justified by the roughly 50% increase in Keurig Dr Pepper’s revenues from 2018 to 2019 (due to acquisition of Dr Pepper Snapple by Keurig Green Mountain which led to the formation of Keurig Dr Pepper), the effect of which was further accentuated by a 43% rise in net income margin, which increased from 7.9% in 2018 to 11.3% in 2019. This effect was reflected in the net income, which more than doubled from $0.6 billion in 2018 to $1.3 billion in 2019. However, the rise of 65% in EPS was slightly lower than growth in net income (114%), mainly due to 30% rise in shares outstanding (due to shares of both companies being combined) between 2018 and 2019.

The rise in EPS was partially offset by a drop in KDP’s P/E multiple, which dropped from 45.9x at the end of 2018 to 32.2x at the end of 2019. The multiple has further dropped to 30.2x currently. This reflects over a 34% decline in the multiple from 2018 to April 2020. However, this sharp drop in P/E multiple between 2018 and 2019 was not due to a change in the company’s fundamentals, but was mainly due to a sharp rise in EPS in 2019 (due to higher revenue base and margins on account of the acquisition), coupled with a stable stock price as the effect of the acquisition was already accounted for in the company’s stock price during 2018-2019 period.  On the contrary, the slight decline in P/E multiple in 2020 is due to the impact of coronavirus, which we explain below.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. KDP’s stock is down by about 6% since January 31 after World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 14%. Moreover, about 90% of KDP’s total revenue comes from the US region, which has been the worst impacted by the outbreak currently. Lower consumer spending and consumption would lead to lower demand for food and beverages, in turn affecting KDP’s revenues.

We believe Keurig Dr Pepper’s Q1 results in April will confirm the trend in revenues. It is also likely to accompany a lower Q2 as-well-as FY’20 guidance. If there isn’t clear evidence of the containment of the virus at the time of the earnings announcement, we believe there is a possibility that KDP’s stock could see a further downside. However, if there are signs of abatement of the crisis by the time Q1 results are announced, the company’s stock is unlikely to see a major upturn, mainly because the stock has not declined sharply in the first place. With only a 6% decline in its stock price since January 31, 2020, KDP has outperformed Coca-Cola (-16%) and the S&P 500 (-14%), with only decline in PepsiCo (-6%) being in line with KDP. But in the current scenario, we believe Keurig Dr Pepper’s stock is likely to remain around its current levels, with a limited upside post coronavirus.

View our dashboard analysis Coronavirus Trends Across Countries, And What It Means For The U.S. for the current rate of coronavirus spread in the U.S. and forecasts on where it could be headed, based on comparison with other countries. Our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a more complete macro picture of historic crashes and how the sell-off during early March compares.

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