Despite rising 80% from its March 2020 lows, at the current price of $36 per share, Keurig Dr Pepper stock (NYSE: KDP) still looks slightly undervalued. KDP stock has increased from less than $20 to almost $36 off its 2020 bottom, slightly less than the S&P which increased by 90% from its 2020 lows. Even though the stock is around 40% above the level at which it was at the end of 2018 and 20% above its pre-Covid (February 2020) high of $29.50, we believe that KDP stock’s recent rally is justified. The stock price rise was driven by expectations of rising demand (as vaccine coverage widens and economic recovery accelerates) and easing of supply constraints following the gradual lifting of lockdowns. Additionally, the company’s low reliance on concentrates and greater exposure to coffee and brewing systems will keep the stock elevated and could, in fact, even see a modest upside. Our dashboard Keurig Dr Pepper (KDP) Stock Has Gained 40% Since 2018 has the underlying numbers.
The stock price rise between 2018 and 2020 is justified by the 56% rise in KDP’s revenues. Revenue growth was mainly due to the acquisition of Dr Pepper Snapple by Keurig Green Mountain which led to the formation of Keurig Dr Pepper. On a per share basis, revenue increased a little less than 20% from $6.90 to $8.20 as shares outstanding also increased due to shares of both companies being combined. However, this effect was slightly offset by a lower P/S multiple. KDP’s P/S multiple dropped from about 5x to 4x between 2018-2020. This was not because of a change in the company’s fundamentals but due to the sharp rise in the RPS following the acquisition. The stock price increased at a lower rate (compared to revenue) between December 2018 and December 2020 as the effect of the acquisition was already accounted for in the price, leading to a drop in P/S. Despite the coronavirus pandemic hitting the world in 2020, KDP has been almost immune to the crisis as is reflected in its current P/S multiple of 4.4x, higher than the 2019 and 2020 level.
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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 2020 results of the company which saw KDP’s revenues rise 4.5% even in the pandemic year. But what has helped KDP thrive during this crisis? 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). Keurig Dr Pepper 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, benefiting directly from the sudden surge in at-home consumption, with manageable exposure to decreased concentrate sales. KDP continues to have an edge over rivals Coca-Cola and PepsiCo, as its coffee segment (38% revenue share) continues to see growth with people moving away from carbonated drinks and replacing the same with beverages like coffee. This growth is set to continue as working at home by millions of people is benefiting the company’s direct and licensed K-Cup coffee sales.
Any further recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Israel. As the global lockdowns are gradually lifted and vaccine coverage expands, the company’s business is expected to grow even faster, as demand is expected to pick up. The company has outperformed its peers in the food & beverage industry and investors’ focus has shifted to 2021 and 2022 numbers. Thus, continued revenue and earnings growth with an elevated P/S multiple is likely to see a modest rise of a little less than 10% from its current level. As per Trefis analysis, KDP valuation works out to $39 per share.
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