Keurig Dr Pepper stock (NYSE: KDP) lost over 30% of its value – dropping from $29 in January 2020 to $20 in March 2020, due to the Covid-19 outbreak and the resultant lockdown, which led to expectations of economic slowdown and lower consumer spending power. This was followed by the multi-billion-dollar Fed stimulus announcement which provided a floor to the stock price as it recovered from April onward and currently stands close to $30 per share. With the current stock price being higher than its level at the beginning of 2020, is the market exuberant or is the price rise warranted? We believe that the stock price rise is justified and, in fact, the stock could go up further by 10% from its current level driven by an increase in revenue and margins through 2021.
Where Is KDP’s Stock Headed?
Trefis estimates Keurig Dr Pepper’ valuation to be $33 per share, around 10% higher that its current market price. The trigger is the management’s reaffirmation of its full-year 2020 guidance where KDP is expected to see growth in revenues as well as earnings, during what is likely to be a very difficult year for consumer-centric businesses, where KDP’s rivals like PepsiCo and Coca-Cola are also projected to see a decline in top and bottom line in 2020. KDP seems to have successfully weathered the coronavirus storm, with growth expected in 2020 as well as in 2021.
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This was evident from the recently released Q2 2020 results for the company. Keurig Dr Pepper’s revenues came in at $2.86 billion, jumping 1.8% y-o-y. On a constant currency basis, sales increased 2.9% y-o-y reflecting strong volume/mix growth of 4.3%. Strong growth in Packaged Beverages and Coffee business more than offset a slight decline in Beverage Concentrates. Adjusted EPS also increased from $0.30 in Q2 2019 to $0.33 in Q2 2020.
With strong Q2 performance, the management reaffirmed its full year 2020 outlook. But at a time when its rivals are likely to see revenue and earnings drop, what is helping KDP to successfully deal with the pandemic? It is the revenue mix of the company. Hardly 13% of KDP’s total revenues comes from concentrates (which are sold to affiliates that manufacture syrups used in fountain drinks). Quarantine and home confinement are translating into a steep slide in fountain sales and a corresponding decline in demand for concentrates. But, 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, is benefiting 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 rivals Coca-Cola and PepsiCo, 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 has helped KDP to suffer less from global supply-chain disruptions due to Covid-19 versus companies like Coca-Cola which have a global distribution system.
As the global lockdowns are gradually lifted, the company’s business is expected to grow even faster, as demand is expected to pick up. For the full year 2020, we expect total revenues to increase by 3.2% to $11.5 billion and further by 3.8% to $11.9 billion in 2021, taking the total revenue growth from 2019-2021 to 7.1%. During the same period net income margin is also expected to increase from 11.3% to 14%. The recent surge in Covid positive cases could prove to be an impediment for food and beverage giants, but this is expected to have minimal impact on KDP as the company was able to thrive even when the crisis was at its peak. Revenue and earnings growth over the next two years, and with investors’ focus having shifted to the 2021 numbers, the company’s stock is expected to rise further. As per Keurig Dr Pepper’s valuation, Trefis has a price estimate of $33 per share for KDP’s stock, reflecting a potential upside of 10% from its current level.
For further insight in to the food and beverage industry, see why we feel Keurig Dr Pepper is better placed compared to Coca-Cola while you can see a comparative analysis of PepsiCo vs. Coca-Cola
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