Is The K-Cup Pod Maker A Better Pick Over Coca-Cola Stock?

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KO: The Coca-Cola Company logo
KO
The Coca-Cola Company

We believe Keurig Dr Pepper stock (NYSE: KDP) is currently a better pick than Coca-Cola stock  (NYSE: KO), given its better prospects. Although Coca-Cola is trading at a comparatively higher valuation of 6.1x trailing revenues vs. 3.6x for Keurig Dr Pepper, this gap in the valuation is largely justified, given its superior profitability and better financial position, as discussed below.

If we look at stock returns, KO, with a 4% fall in the last twelve months, has fared better than KDP, down 10%, and the broader S&P 500 index, down 9%. There is more to the comparison, and in the sections below, we discuss why we believe KDP stock will offer better returns than KO stock in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Coca-Cola vs. Keurig Dr PepperWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Keurig Dr Pepper’s Revenue Growth Has Been Better Over The Recent Years

  • Both companies posted sales growth over the last twelve months. Still, Coca-Cola’s revenue growth of 11% is slightly higher than 9% for Keurig Dr Pepper.
  • However, if we look at a longer time frame, Keurig Dr Pepper fares better, with its sales rising at an average annual growth rate of 7.3% to $14 billion in 2022, compared to $11 billion in 2019, while Coca-Cola’s sales grew at an average rate of 5.6% to $43 billion in 2022, vs. $37 billion in 2019.
  • For Coca-Cola, both at-home and away-from-home channels have grown, primarily driven by solid pricing trends.
  • North America and Latin America segments saw strong 19% y-o-y sales growth in 2022, led by both volume growth and better price realization.
  • Looking forward, a challenging macroeconomic environment and a strengthening dollar is expected to weigh on the company’s volume growth rate in the near term. Still, better pricing should drive the overall top-line growth.
  • Keurig Dr Pepper derives 47% of its revenue from packaged beverages (ending up in grocery and convenience stores) and 35% of sales from Keurig brewing systems and K-Cups. Concentrates, sold to affiliates that manufacture syrups used in fountain drinks, account for 12% of its total sales, with its only international division – Latin America – making up 5% of revenue.
  • Similar to the trend seen with Coca-Cola, Keurig Dr Pepper is also seeing its revenue growth primarily from better price realization. The company’s top line grew 11% in 2022, with a 10.6% favorable net price realization and volume/mix growth of 0.5%.
  • We expect this trend to continue with better price realization driving sales growth, while the volume growth may remain tepid in the near term.
  • Our  Coca-Cola Revenue Comparison and Keurig Dr Pepper Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Coca-Cola Is More Profitable

  • Coca-Cola’s operating margin of 30.2% in 2022 was slightly better than 29.4% for Keurig Dr Pepper.
  • This compares with 32.4% and 21.3% in 2019 and fiscal 2020, respectively.
  • Coca-Cola’s free cash flow margin of 25.6% is also better than 22.8% for Keurig Dr Pepper.
  • Our Coca-Cola Operating Income Comparison and Keurig Dr Pepper Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Coca-Cola fares better with its 14% debt as a percentage of equity, lower than 25% for Keurig Dr Pepper, and its 12% cash as a percentage of assets, higher than the 1% for the latter, implying that Coca-Cola has a better debt position, and has more cash cushion.

3. The Net of It All

  • We see that Coca-Cola is more profitable, has a better debt position and has more cash cushion.  On the other hand, Keurig Dr Pepper has seen better revenue growth over recent years and is available at a comparatively lower valuation.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Keurig Dr Pepper is currently the better choice.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 11% for Keurig Dr Pepper over this period and a 6% expected return for Coca-Cola stock, implying that investors will likely be better off buying KDP over KO, based on Trefis Machine Learning analysis – Coca-Cola vs. Keurig Dr Pepper – which also provides more details on how we arrive at these numbers.

While KDP stock can offer better returns over KO, it is helpful to see how Coca-Cola’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Coca-Cola vs. Footlocker.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Mar 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
KO Return 0% -6% 44%
KDP Return 0% -3% -62%
S&P 500 Return 0% 4% 78%
Trefis Multi-Strategy Portfolio 1% 8% 241%

[1] Month-to-date and year-to-date as of 3/3/2023
[2] Cumulative total returns since the end of 2016

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