What’s Next For Keurig Dr Pepper Stock After A 15% Fall In A Year?

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KDP: Keurig Dr Pepper logo
KDP
Keurig Dr Pepper

Keurig Dr Pepper (NASDAQ: KDP) reported its Q4 results last week, broadly aligning with the street estimates. The company reported revenue of $3.9 billion and adjusted profit of $0.55 per share compared to the consensus estimates of $3.9 billion in sales and $0.54 earnings per share. The company continued to benefit from pricing gains while volume declined during the quarter. KDP stock has declined over 15% in the last twelve months and we think it’s now undervalued. 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 35% for the S&P 500 over this roughly three-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 -7% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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 PG, COST, and KO, 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 is undervalued. We estimate Keurig Dr Pepper’s Valuation to be $38 per share, reflecting over 25% upside from its current levels of $30. Our forecast is based on a 20x P/E multiple for KDP and expected earnings of $1.93 on a per-share and adjusted basis for the full year 2024. The 20x P/E ratio aligns with the stock’s average over the last five years.

Keurig Dr Pepper’s revenue of $3.9 billion in Q4 was up 1% on a constant currency basis, driven by a 5% pricing gain, partly offset by a 4% lower volume/mix. Looking at segments, U.S. Refreshment Beverages sales were up 7%, International segment revenue was up 11%, while the U.S. Coffee segment saw a 10% y-o-y decline in sales. Keurig Dr Pepper’s adjusted operating margin rose 150 bps y-o-y to 28.5% in Q4. Higher revenues and margin expansion led to a 10% rise in the bottom line, which stood at $0.55 on an adjusted basis. Looking forward, Keurig Dr Pepper expects adjusted sales to rise in the mid-single-digit range and adjusted earnings per share to rise in high single-digits in 2024.

Although the pricing growth may moderate in the coming quarters, the company has been able to expand its margins and it is working on reviving the coffee sales in the U.S. The new product launches in the beverages segment will further bolster its overall sales growth. We think investors can use the current dip in KDP stock for robust gains in the long run.

While KDP stock appears to be undervalued, 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 Feb 2024
MTD [1]
Since start
of 2023 [1]
2017-24
Total [2]
 KDP Return -6% -17% -67%
 S&P 500 Return 5% 33% 127%
 Trefis Reinforced Value Portfolio 3% 42% 627%

[1] Returns as of 2/27/2024
[2] Cumulative total returns since the end of 2016

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