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Bear of the Day: Keurig Dr Pepper, Inc. (KDP)

Brian Hamilton
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Bear of the Day: Keurig Dr Pepper, Inc. (KDP)

Keurig Dr Pepper, Inc (KDP), a Zacks Rank #5 (Strong Sell), is a leading coffee and beverage company in North America, with annual revenue in excess of $11 billion. KDP holds leadership positions in soft drinks, specialty coffee and tea, water, juice and juice drinks and mixers, and markets the #1 single serve coffee brewing system in the U.S. The Company maintains an unrivaled distribution system that enables its portfolio of more than 125 owned, licensed and partner brands to be available nearly everywhere people shop and consume beverages. With a wide range of hot and cold beverages that meet virtually any consumer need, KDP key brands include Keurig®, Dr Pepper®, Green Mountain Coffee Roasters®, Canada Dry®, Snapple®, Bai®, Mott’s® and The Original Donut Shop®. The Company employs more than 25,000 employees and operates more than 120 offices, manufacturing plants, warehouses and distribution centers across North America.

New Merger

On July 9th, Keurig Dr. Pepper finalized the merger between Keurig Green Mountain and Dr. Pepper which created the third largest beverage company in the U.S., and is now the seventh largest company in the Food and Beverage segment.  Shares began trading on the NYSE on July 10th

Regarding the merger, Keurig Dr Pepper CEO Bob Gamgort commented, “The combination of these two great companies creates the scale, portfolio and selling and distribution capabilities to compete differently in the beverage industry. With a large stable of iconic brands and the leading single-serve coffee brewing system on the market, KDP has the ability to satisfy any beverage need or consumption occasion—hot or cold, at work or at play, at home or on the go—and the capability to get our brands to consumers virtually anytime and anywhere they purchase beverages. I am honored to lead this great team and excited that together we will challenge this industry in a new way.”

Issues Facing the New Company

The merger has some critics stating that there are several headwinds facing the new company with limited revenue synergies being the biggest issue.  Already many convenience store retailers that have current contracts with Dr. Pepper have determined that they will not carry Keurig products.  Further, analysts have pointed out that there are limited opportunities for the new company to sell legacy Dr. Pepper products in the current distribution channels utilized by Keurig. 

Two other key issues facing the KDP are pricing power and distribution issues with a key Allied Brand of Dr. Pepper.  Dr. Pepper distributes drinks made by other brands including Fiji Water, Vita Coco, and Body Armor, and the more drinks they distribute the more money they make.  This revenue stream is expected to be negatively impacted by Fiji’s announcement that they will build its own distribution stream as it was one of the best sellers in its Allied Brands collection.  Another issue has been Keurig’s deteriorating pricing power issues with its pods.  These issues add to the potential revenue synergies problems.

The merger, and worries about revenue synergies has caused the earnings estimates for the next two quarters and next two years to significantly decline.  Further, as you can see in the analyst’s agreement table below there is unanimous agreement on the downside.

Bottom Line

While in the long-term, the merger between Keurig and Dr. Pepper could be very beneficial for both companies, the near-term outlook is a bit concerning.  Therefore, it might be best to wait on the sidelines until these issues are ironed out by management.

If you are inclined to invest in the Beverages/Soft Drink segment, you would be best served by looking into Primo Water Corp (PRMW), who currently carries a Zacks Rank #2 (Buy) rating.

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