Is Keurig Dr Pepper A Better Pick Over This Food And Beverage Giant?

+4.40%
Upside
38.31
Market
40.00
Trefis
KDP: Keurig Dr Pepper logo
KDP
Keurig Dr Pepper

The shares of Keurig Dr Pepper (NYSE: KDP) currently trade at $39 per share, which is 38% above its pre-Covid level. On the other hand, shares of Mondelez International (NASDAQ: MDLZ) trade at $68 per share currently, which is only 18% above its pre-Covid level. Does that make MDLZ a better stock pick compared to KDP? Both the companies belong to the food and beverage industry – providing packaged beverages, etc. In addition to beverages, Mondelez International also provides food and snack products. Though MDLZ as a company is much bigger and geographically more diversified, Keurig Dr Pepper’s higher valuation (P/S multiple) reflects a much better revenue growth and product mix. Most of KDP’s sales come from brewing systems and bottled beverages. This puts it at an advantageous position compared to MDLZ. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis Keurig Dr Pepper vs. Mondelez International: Industry Competitors, But Keurig Dr Pepper Is A Better Bet.

Revenue Growth

  • Keurig Dr Pepper’s revenue growth has been stronger than Mondelez International’s over recent years, with KDP revenues expanding more than 40% in the last three years, compared to a rise of hardly 1% in Mondelez International revenues. Such a sharp rise in KDP’s revenue was mainly driven by the acquisition of Dr Pepper Snapple by Keurig Green Mountain which led to the formation of Keurig Dr Pepper. KDP also saw better LTM revenue growth without any acquisition as KDP did not see any major impact of the pandemic on its sales, as at-home demand for K-Cups increased.
  • KDP’s four operating segments – the company 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. Hardly 13% of KDP’s total revenues comes from concentrates (which are sold to affiliates that manufacture syrups used in fountain drinks), with its only international division – Latin America – making up only 5% of revenue.
  • Mondelez International generates 96% of its revenue from food/snacks and about 4% from beverages

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Returns (Profits)

  • KDP’s LTM operating margin is 5.6%, much lower than MDLZ’s 22.4%.
  • MDLZ’s margins have historically been better than KDP’s. The recent rise in MDLZ’s margins were a result of higher revenues.
  • KDP’s top line growth and acquisition synergies, along with at-home demand for its products, will lead to margin growth in the coming quarters, thus narrowing the gap with MDLZ.

Risk

  • With respect to financial leverage, KDP is in a better position with debt as a percentage of equity standing at less than 52%. The metric is 65% in the case of MDLZ.
  • However, MDLZ has managed its cash in a better way. Its cash as a percentage of assets stands at over 5% compared to KDP’s 0.4%.

Net of it all

Though Mondelez International seems to have better profitability, KDP is likely to exhibit strong revenue growth and better debt management going forward. What benefits Keurig Dr Pepper is also its product mix. KDP continues to have an edge over rivals like Coca-Cola, Mondelez International, and PepsiCo, as its coffee segment continues to see growth with people moving away from carbonated drinks and replacing the same with beverages like coffee. Also, unlike other major players in the F&B industry, KDP seemed to look unaffected by the pandemic. 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. KDP’s stock is likely to offer much higher returns compared to MDLZ. We estimate KDP’s valuation to be $39 per share, which is only slightly above its current market price.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Jan 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
KDP Return 7% 7% -57%
MDLZ Return 3% 3% 54%
S&P 500 Return -2% -2% 108%
Trefis MS Portfolio Return -7% -7% 264%

[1] Month-to-date and year-to-date as of 1/17/2022
[2] Cumulative total returns since the end of 2016

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