Despite almost a 45% rise since the March lows of this year, at the current price of around $28 per share, we believe Keurig Dr Pepper stock (NYSE: KDP) is still undervalued. KDP stock has increased from less than $20 to a little over $28 off the recent bottom, slightly less than the S&P which increased by 50% from its recent lows. Even though the stock is around 15% above the level at which it was at the end of 2018, it is still lower than its pre-Covid (February 2020) high of $29.50. We believe that KDP’s stock could rise by about 15% from its current level, driven by expectations of rising demand and easing of supply constraints following the gradual lifting of lockdowns. Our dashboard What Factors Drove 15% Change In Keurig Dr Pepper Stock Between 2018 And Now? has the underlying numbers.
Some of the stock price rise between 2018 and 2019 is justified by the 50% rise in KDP’s revenues. This rise was mainly due to the acquisition of Dr Pepper Snapple by Keurig Green Mountain which led to the formation of Keurig Dr Pepper. This effect was further accentuated by a 43% rise in net income margin, which increased from 7.9% in 2018 to 11.3% in 2019. On a per share basis, earnings increased 65% from $0.54 to $0.89 as shares outstanding also increased due to shares of both companies being combined.
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KDP’s P/E multiple dropped sharply from 46x to 32x during this period. This was not because of a change in company’s fundamentals but due to the sharp rise in the EPS following the acquisition. Stock price increased only at a modest rate between December 2018 and December 2019 as the effect of the acquisition was accounted for in the price, leading to a drop in P/E. Despite the coronavirus pandemic hitting the world in 2020, KDP has been almost immune to the current crisis as is reflected in its current P/E multiple of 32x, similar to the 2019 level.
Where is the stock headed?
The global spread of coronavirus in early 2020 affected industrial and economic activity, which affected consumption and consumer spending. However, KDP has not been affected much by the pandemic. This was evident from the recently released Q2 2020 results for the company. Keurig Dr Pepper’s revenues came in at $2.86 billion, increasing 1.8% y-o-y.
What has helped KDP outperform the market? 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. Also, the management reaffirmed its full year 2020 outlook. The company has outperformed its peers in the food & beverage industry and investors’ focus has shifted to 2021 numbers. Thus, continued revenue and earnings growth with an elevated P/E multiple is likely to lead to about a 15% rise in KDP’s stock. As per Trefis analysis, Keurig Dr Pepper valuation works out to $33 per share.
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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