Keurig Dr Pepper (NYSE: KDP) reported its Q3 results last month, with revenues aligning and earnings marginally above the street estimates, and we believe that KDP stock has room for growth, as discussed below. The company reported revenue of $3.8 billion and adjusted profit of $0.48 per share compared to the consensus estimates of $3.8 billion in sales and $0.47 earnings per share. In this note, we discuss Keurig Dr Pepper’s stock performance, key takeaways from its recent results, and valuation.
KDP stock has seen little change, moving slightly from levels of $30 in early January 2021 to around $30 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. Overall, the performance of KDP stock with respect to the index has been lackluster. Returns for the stock were 15% in 2021, -3% in 2022, and -13% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 14% in 2023 (YTD) – indicating that KDP underperformed the S&P in 2021 and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector, including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
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Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could KDP face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, KDP stock looks like it has room for growth. We estimate Keurig Dr Pepper’s Valuation to be $37 per share, reflecting an 18% upside from its current levels of $31. Our forecast is based on a 21x P/E multiple for KDP and expected earnings of $1.78 on a per-share and adjusted basis for the full year 2023. The 21x P/E ratio aligns with the stock’s last five-year average. The company reiterated its 2023 outlook, with sales expected to rise 5% to 6% and adjusted earnings up 6% to 7%.
Keurig Dr Pepper’s revenue of $3.8 billion in Q3 was up 4% on a constant currency basis, driven by a 5.5% pricing gains, partly offset by a 1.4% lower volume/mix. Looking at segments, U.S. Refreshment Beverages sales were up 6%, International segment revenue was up 21%, while the U.S. Coffee segment saw a 3% y-o-y decline in sales. Keurig Dr Pepper’s adjusted operating margin fell 20 bps y-o-y to 25.9% in Q3. Its adjusted profit of $673 million in Q3 reflected a 2.6% rise from its $656 million profit figure in the prior year quarter. The adjusted earnings of $0.48 per share was up 4% y-o-y.
KDP stock is trading at just 3.0x revenues versus its last three-year average of 4.1x sales, and it will likely see higher levels going forward. However, investors should be aware of potential risks. We believe that pricing growth will moderate in the coming quarters, and a possible recession could imply reduced consumer spending, weighing on overall sales growth.
While KDP stock appears to have room for growth, 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.
|S&P 500 Return||5%||14%||96%|
|Trefis Reinforced Value Portfolio||3%||21%||521%|
 Month-to-date and year-to-date as of 11/9/2023
 Cumulative total returns since the end of 2016