Keurig Dr Pepper vs. Coca-Cola: Why Is Only One Suffering?

by Trefis Team
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Keurig Dr Pepper stock (NYSE: KDP) is down by about 7% so far in 2020, whereas Coca-Cola’s stock (NYSE: KO) is down by over 16%. If we compare the stock price trends for these beverage companies over recent years, we can see that KDP’s stock price has increased 8% from $25 at the end of 2018 to $27 as of 26th May 2020, in comparison to KO’s stock price remaining flat at the 2018 level. What is surprising is that KDP’s outperformance was possible despite Coca-Cola’s margins being consistently (in 2018 and 2019) more than double that of Keurig Dr Pepper’s. What has helped KDP achieve a superior performance vis-à-vis KO? Our dashboard Keurig Dr Pepper vs. Coca-Cola: Does The Stock Price Movement Make Sense? has the underlying numbers.

Coca-Cola’s net income margin of 18.8% and 23.9% in 2018 and 2019, respectively, is more than 2x that of KDP’s margin of 7.9% and 11.3% during these 2 years. Thus, the primary factor contributing toward KDP’s stock price growth is the sharp rise in Keurig Dr Pepper’s revenue, which has increased by 50% between 2018 and 2019 (with 2019 being the first full year post merger of Keurig Green Mountain and Dr Pepper Snapple to form Keurig Dr Pepper in July 2018), over 5.7x the revenue growth of 8.7% seen of Coca-Cola during the same period. Additionally, though both companies have seen their P/E multiples falling since 2018, currently Keurig Dr Pepper’s P/E multiple of 30.3x is significantly higher than the 22.1x multiple for Coca-Cola.

Keurig Dr Pepper and Coca-Cola Focus On Different Revenue Mix

Let’s have a closer look at the core business prospects. KDP’s portfolio extends beyond just coffee makers, and includes carbonated drinks 7UP and A&W, and coffee brands such as Peet’s Coffee and Donut Shop. It has over 125 brands including the recent acquisition of Big Red. In contrast, Coca-Cola has a broad drink portfolio and is feeling the need to diversify, for which the company shelled out $5 billion for Costa Coffee in 2018. KDP’s market cap is significantly lower at $38 billion compared to KO’s $198 billion.

In the recently announced Q1 results, Coca-Cola announced that it will not meet its 2020 outlook due to the Covid-19 pandemic’s impact on its business. On the contrary, Keurig Dr Pepper’s management has stuck to its guidance and project a rise in revenue as well as earnings for 2020. Despite such a vast difference in size, what is helping KDP’s management remain confident about growth in 2020 when the food & beverage industry is suffering? The answer lies in the revenue mix of these companies.

Hardly 13% of KDP’s total revenues comes from concentrates (which are sold to affiliates that manufacture syrups used in fountain drinks). Though Coca-Cola does not disclose its concentrate sales share, it forms a significantly higher portion of its revenue from each geography. Quarantine and home confinement are translating into a steep slide in fountain sales and a corresponding decline in demand for concentrates. KO in its recent earnings conceded that it is set to experience an adverse impact of social distancing, cancellation of sporting and entertainment events, travel restrictions, etc. On the contrary, KDP which derives 44% of its revenue from bottled beverages (ending up in grocery and convenience stores) and 38% of sales from Keurig brewing systems and K-Cups, will benefit more directly from the sudden surge in at-home consumption, with manageable exposure to decreased concentrate sales. With people moving away from carbonated drinks and replacing the same with beverages like coffee, KDP has an edge over Coca-Cola, as its coffee segment (38% revenue share) will see growth as working at home by millions of people will benefit the company’s direct and licensed K-Cup coffee sales.

Also, KDP’s revenue is concentrated in the US and Canada, with its only international division – Latin America – making up only 5% of revenue. This compares with Coca-Cola’s over 60% revenue being contributed by non-US markets. Thus, KDP is likely to suffer less from global supply-chain disruption due to Covid-19 versus companies like Coca-Cola which have a global distribution system.

Positive revenue and earnings outlook along with much less disruption compared to Coca-Cola has helped Keurig Dr Pepper command a higher P/E multiple of 30.3x currently compared to 22.1x for Coca-Cola. Keurig Dr Pepper Valuation by Trefis estimates a fair price of $29 per share for KDP’s stock, assigning a P/E valuation multiple of 30x.

If there are no signs of abatement of the coronavirus crisis by the end of Q2 2020, Coca-Cola’s stock could see a further drop from its current level, while KDP is expected to remain strong. In contrast, if there are clear signs of crisis abatement in June 2020, Coca-Cola’s stock could rise to about $50, outperforming KDP.

 

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