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STOCK ANALYSIS: Keurig Dr Pepper, often overlooked and that could result in opportunities

Published by MEXEM Technical Analysis

March 8, 2023 8:36 AM
Published - March 03, 2023 @ 5:42 PM (CET)

Keurig Dr Pepper (NASDAQ:KDP) shares have been lagging behind for a while. Relative to rivals Pepsico and Coca Cola, the share price is underperforming, despite the results the company offers positive signs. We like to take a closer look at the stock to see what it has to offer.

Performance of The Coca Cola Enterprise (Blue), Pepsico (Black) and Keurig Dr Pepper (Orange) during the last 12 months.

In 2018, Keurig Dr Pepper Inc was formed after Keurig Green Mountain, better known as Green Mountain Coffee Roasters until 2014, completed its acquisition of the Dr Pepper Snapple Group. The corporation Well-known brands included and which you may have heard of are Schweppes, Dr Pepper, Canada Dry, 7UP or Evian. The non-alcoholic beverage manufacturer and distributor sells its products to bottlers, distributors and retailers, including hypermarkets, supermarkets, wholesalers, e-commerce retailers, corporates, grocery shops, vending machines and more. Both its factories, warehouses and distribution centres are located in North America, with its headquarters in Burlington, Massachusetts in the United States.

Recent performance by segment

Keurig Dr Pepper divides its operations into four main segments: Coffee Systems, Packaged Beverages, Beverage Concentrates and Latin America Beverages. The company managed to grow in each of the four segments during the past year.

Source: Keurig Dr Pepper Inc.

Coffee Systems

This segment mainly focuses on the development, production and sale of coffee machines and the coffee, in its various forms, to be used with them.
For the past year, the company here experienced a 5.6% increase in net sales for total segment revenue of $4.98 million. When a constant currency value is taken into account, the figure even rises to 6.2% growth.

This increase is largely due to some pricing actions put in place in late 2021 and mid-2022. Overall, the segment is serving around 2 million additional households in the US with a Keurig coffee system, which is in line with the company's long-term goals. Adjusted profit for the year within Coffee Systems does experience a 7.5% decline, a reflection of the difficult inflationary pricing pressures the sector is facing. Adjusted profit amounts to about 30.4% of total net sales for this segment.

Packaged Beverages

Within the Packaged Beverages segment, net sales increased more strongly, growing 12.4% on a constant currency basis. These figure s are a continuation of previous good performance within this segment and is related to the realisation of a better net price for the products sold. The broad support for the positive results can be found within Keurig Dr Pepper's CSD portfolio, being Carbonated Soft Drinks or Carbonated Beverages, where a successful Zero Sugar line was launched for several brands.

Looking at adjusted profit, we note an increase of 1.2% to $1.13 billion. 17.1% of total net sales of $6.61 billion can thus be converted into profit for this segment.

Beverage Concentrates

One of the company's two smaller segments is that of beverage concentrates and syrups, which the company sells under its own brand names or to white goods manufacturers. Here, the company was able to increase net sales for 2022 by 16.4% taking into account constant currency value to a total of $1.73 billion. Slightly lower volumes of Schweppes and Crush were cushioned by stronger sales of Dr Pepper and Canada Dry.

At 1.23 billion, adjusted operating profit was a whopping 71.5% of net sales.

Latin America Beverages

This segment includes all international sales of Packaged Beverages and Beverage Concentrates products. A strong net sales increase of 23% taking into account an unchanged currency value year-on-year is mainly due to an improvement in net product pricing. Adjusted profit for the year increased 18.5% to $162 million, or 21.8% of total net sales which came to $743 million.

Current valuation and outlook

Keurig Dr Pepper, despite its results and market share, still often remains under the radar of many investors. Although the numbers within the company's coffee segment have some investors wondering, the shares underperformed against competition over the past year, as shown on the chart at the top.

However, since January, the whole sector had a weaker start and shares of KDP (NASDAQ:KDP) had to take a fall of about 2.50%. Pepsico (NASDAQ:PEP) -3.35% and The Coca Cola Company (NASDAQ:KO) - 5.62% also shared in the blows while the overall index S&P 500 can boast a growth of 3.60% over the same period.

Positive signs for KDP can be found in the fact that almost 90% of its sales come from the US, so they are little affected by a strong dollar hampering exports or a slow reopening of the Chinese market, which many international companies do face.

Unlike competitors Pepsi and Coca Cola, Keurig Dr Pepper has also opted to tap into the energy drinks market, but through a partnership model with existing brands such as Red Bull or Nutrabolt. This way, they avoid a strong disappointment that follows if this does not pay off sufficiently from day one as the competition has been allowed to experience. It gives KDP time to gradually participate in one of the faster-growing segments within the industry.

The stock is currently trading around $34.50 and has a moderate buy recommendation among 9 analysts over the past 3 months, with an average price target of $39.78, offering an upside potential of 15.30%.

Source: TipRank Ratings via MEXEM customer portal

The company expects net sales growth of 5% and adjusted value-per-share growth of 6-7% in 2023.

Bryant VanCronkhite, senior portfolio manager at Allspring Global Investments sums it up neatly:

"Keurig Dr Pepper has great assets, a management team that is smart with capital, strong demand and good pricing, creating a cash flow machine that continues to strengthen the company's balance sheet."


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