Which Is A Better Pick – Keurig Dr Pepper Stock Or Zoetis?

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We believe that Zoetis stock (NYSE: ZTS), an animal health company, is a better pick than Keurig Dr Pepper stock (NASDAQ: KDP), given its better prospects. Although these companies are from different sectors, we compare them because they have a similar operating income of around $3 billion. The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. Since these stocks are from different sectors, comparing P/S against one another may not be helpful. We compare their current multiples with the historical ones in the sections below to better gauge their valuations.

Interestingly, Zoetis has had a Sharpe Ratio of 0.9 since early 2017, while the figure stood at -0.1 for Keurig Dr Pepper and 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Looking at stock returns, ZTS has fared much better, with 21% gains this year compared to a 9% decline for KDP stock and a 13% rise in the broader S&P500 index. There is more to the comparison, and in the sections below, we discuss why we believe ZTS will offer better returns over KDP in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in this analysis.

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1. Zoetis’ Revenue Growth Is Slightly Better

  • Zoetis’ 9% average annual revenue growth rate in the last three years is slightly better than 8% for Keurig Dr Pepper.
  • Keurig Dr Pepper did not see any significant impact of the pandemic on its sales, as at-home demand for K-Cups increased due to a sudden surge in at-home consumption.
  • The company has the edge over other beverage companies as its coffee segment continues to grow, with people moving away from carbonated drinks and replacing them with other beverages.
  • Zoetis has benefited from increased animal adoption in the U.S., aiding its sales of parasiticide products for companion animals in recent years.
  • Pricing gains have also bolstered Zoetis’ sales growth.
  • Looking at the last twelve months period, Keurig Dr Pepper’s 10% sales growth is better than 3% for Zoetis.
  • The revenue growth for both companies in the last twelve months was led by better price realization.
  • Our Keurig Dr Pepper Revenue Comparison and Zoetis Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Zoetis’ revenue is expected to grow faster than Keurig Dr Pepper’s over the next three years, based on Trefis Machine Learning analysis.

2. Zoetis Is More Profitable

  • Keurig Dr Pepper’s operating margin has contracted from 21% in 2019 to 17% in 2022, while Zoetis’ operating margin expanded from 32% to 36% over this period.
  • Also, looking at the last twelve-month period, Zoetis’ operating margin of 37% fares better than 13% for Keurig Dr Pepper.
  • Our Keurig Dr Pepper Operating Income Comparison and Zoetis Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Zoetis fares better, with its 8% debt as a percentage of equity lower than 28% for Keurig Dr Pepper and its 13% cash as a percentage of assets higher than 1% for the latter, implying that Zoetis has a better debt position and more cash cushion.

3. The Net of It All

  • We see that Zoetis has seen better revenue growth, is more profitable, and has a better financial position. To some extent, this also explains its higher P/S multiple of 10x sales compared to 3x for Keurig Dr Pepper.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Zoetis is the better choice of the two, primarily due to its superior expected sales growth.
  • If we compare the current valuation multiples to the historical averages, KDP fares better, with its stock currently trading at 3.1x revenues vs. its last five-year average of 4.1x. In contrast, ZTS stock trades 10x revenues vs. the last five-year average of 11x. 
  • Our Keurig Dr Pepper Valuation Ratios Comparison and Zoetis Valuation Ratios Comparison offers more details.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 8% for KDP over this period vs. a 19% expected return for Zoetis, based on Trefis Machine Learning analysis – Keurig Dr Pepper vs. Zoetis– which also provides more details on how we arrive at these numbers.

While ZTS may outperform KDP in the next three years, it is helpful to see how Keurig Dr Pepper’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Sep 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 KDP Return -3% -9% -64%
 ZTS Return -7% 21% 232%
 S&P 500 Return -4% 13% 93%
 Trefis Reinforced Value Portfolio -6% 24% 534%

[1] Month-to-date and year-to-date as of 9/26/2023
[2] Cumulative total returns since the end of 2016

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