Keurig Dr Pepper stock (NYSE: KDP) is currently (as of 23rd June) at the same level as it was on 31st January 2020 (when WHO declared a global health emergency), whereas PepsiCo stock (NASDAQ: PEP) is down by about 8% over the same period. If we compare the stock price trends for these beverage giants over recent years, we can see that KDP’s stock price has increased 8% from $25 at the end of 2018 to $29 as of 23rd June 2020, in comparison to PEP’s stock price which increased from $107 to $131 during this time. What is surprising is that PEP’s outperformance was possible despite KDP’s revenue growth and margins being higher than that of PepsiCo. What has helped PEP achieve a superior performance vis-à-vis KDP? Our dashboard Keurig Dr Pepper vs. PepsiCo: Does The Stock Price Movement Make Sense? has the underlying numbers
Keurig Dr Pepper revenues increased by 50% between 2018 and 2019 compared to a growth of 3.9% seen for PepsiCo revenues during the same period. But KDP’s sharp revenue growth was mainly due to 2019 being the first full year post merger of Keurig Green Mountain and Dr Pepper Snapple to form Keurig Dr Pepper in July 2018. Additionally, PepsiCo’s net income margins have dropped from 19.4% in 2018 to 10.9% in 2019, while at the same time, KDP’s margins have increased from 7.9% to 11.3% (due to merger synergies). Thus, the primary factor contributing toward PEP’s superior stock price performance is the sharp rise in its P/E multiple. Though PepsiCo’s P/E ratio currently is less than KDP’s, PEP’s P/E multiple increased from 12x in 2018 to 25x now, compared to a drop in the case of KDP from 46x to 33x. Increase in PepsiCo’s valuation multiple was also a reflection of the company’s ability to maintain steady revenue growth despite its revenue base being almost 6x KDP’s. Additionally, the company’s newly announced 2019 Productivity Program is designed to help the company achieve cost efficiencies, leading to expectations of strong margin growth in the medium term which has in turn kept the company’s stock elevated.
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PepsiCo and Keurig Dr Pepper Focus On Different Revenue Mix
Let’s have a closer look at the core business prospects. Though both companies are mostly known as beverage giants competing with each other, what remains key is the revenue mix of these two companies. KDP is wholly into beverages ranging from carbonated soft drinks, non-carbonated beverages, coffee, juices, etc. PepsiCo, along with beverages, has a much more diversified business with almost half of its revenues coming from snacks and food products. As people become more health conscious and move away from carbonated drinks, KDP is likely to feel the brunt of this much more as PepsiCo’s food and snacks division will help it buffer the changing consumer preferences.
Additionally, KDP’s operations are mainly concentrated in the US and Canada, whereas PepsiCo’s business spreads across continents, with the company going in for acquisitions (eg: SodaStream) to increase its revenue base, while existing brands such as Frito-Lay remain the biggest revenue and margin earner for the company.
The lockdowns driven by the current crisis has taken a much higher toll on PepsiCo in the form of lower demand and supply bottlenecks. We believe that as the lockdowns are eased and there are signs of abatement of the crisis by the time of the Q2 2020 results announcement, PepsiCo is likely to outperform Keurig Dr Pepper. KDP’s stock has already recovered to its pre-crisis level and a further upside looks difficult. On the contrary, despite a strong recovery, PepsiCo’s stock still has scope for further growth, with Trefis having a price estimate of $141 for PEP’s stock, higher than its current market price.
Despite PepsiCo being a better bet compared to KDP, here’s why we feel Keurig Dr Pepper is better placed compared to Coca-Cola. Additionally, also see a comparative analysis of PepsiCo vs. Coca-Cola.
Along with understanding the beverage war, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.