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Here's What You Must Know About Keurig Dr Pepper (KDP) Stock

Zacks Equity Research
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Keurig Dr Pepper Inc. KDP portrays mixed sentiments. While it is witnessing softness in the Coffee Systems business, its strategy focused on partnerships and acquisitions bodes well for long-term growth. The company is also seeing strong in-market gains and market share growth for the CSD portfolio, single-serve coffee and other categories, which helped it reach the target for 2018.

Let’s analyze the stock.

Integration Efforts Aid Positive Earnings Trend

Though Keurig Dr Pepper’s sales lagged estimates in fourth-quarter 2018, top and bottom lines improved year over year due to gains from the merger between Keurig and Dr Pepper in July 2018. Earnings were aided by an increase in adjusted pro forma operating income and a considerable decline in interest expenses due to reduced indebtedness and unwinding of several interest rate swap contracts. Sales mostly gained from merger benefits and robust volume/mix growth.

Partnership & Acquisition Strategy

Keurig Dr Pepper remains focused on partnerships and acquisitions, which form an important part of its growth strategy. Since the completion of the merger, it acquired Big Red and agreed to acquire CORE Hydration, adding these partner brands to its owned portfolio. It also added Forto Coffee Energy Shots as new partner and expanded distribution terms with Peet's for ready-to-drink Iced Expresso. Additionally, the company recently signed a long-term agreement to sell, distribute and merchandise the Evian brand across the United States.

The company also added the iconic Canadian coffee brand, Tim Horton’s, and the U.S.-based bakery-cafe brand, Panera as Keurig partners. Furthermore, it signed an agreement with Met café in Canada, which was an unlicensed brand previously and will begin distribution of products in 2020. Meanwhile, Keurig Dr Pepper exited FIJI Water and BODYARMOR drink brands as part of the recent reorganization of its allied brands.

Long-term Targets on Track

Keurig Dr Pepper remains on track with long-term targets set out at the time of the merger in July 2018. Though its earnings view for 2019 lagged analysts’ expectations, the earnings growth forecast of 15-17% was in line with the long-term target for the 2018-2021 period. Further, the company estimates net sales growth of about 2% in 2019, in sync with its long-term sales growth target of 2-3%. Additionally, it expects significant cash flow generation and rapid deleveraging, targeting leverage ratio of less than 3.0 in two to three years from the closing of the merger.

Hurdles in Growth Path

Though the aforementioned factors position the company for growth, persistent softness in the Coffee Systems business due to lower volume for coffee brewers is hurting the top line. As a result, sales missed estimates in fourth-quarter 2018, contributing to the dismal top-line surprise trend. With this, the company delivered negative sales surprise in four of the last six quarters.

Notably, all of Keurig Dr Pepper’s segments reported sales growth, except for Coffee Systems, which witnessed a sales decline of 0.5%. The segment’s volume/mix gains from the increase in K-Cup pod volume were offset by lower volume for brewers due to the timing of shipments between third and fourth quarters of 2018, and the discontinuation of certain legacy Keurig brewer models. Lower pricing and currency headwinds were other deterrents for sales growth for the segment.

Further, the company is not immune to the industry headwinds related to the CSD category and higher input costs, which is hurting its peers, including Monster Beverage MNST, Coca-Cola KO and PepsiCo PEP. Also, the company’s cross-border presence exposes it to unfavorable currency movements due to the strengthening of the U.S. dollar.

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