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Here's Why Keurig Dr Pepper Stock is Displaying Strength

Zacks Equity Research
·5 mins read

Keurig Dr Pepper Inc. KDP has been displaying strong momentum despite the turmoil caused by the coronavirus outbreak. The stock has won investors’ applause for continued top and bottom-line growth in first-quarter 2020 on strength across all segments. The company is particularly benefiting from positive trends in the Packaged Beverages and Coffee Systems segments, which have been witnessing increased sales due to the stay-at-home and work-from-home orders resulting from the outbreak. Also, its financial strength safeguards its position amid the pandemic.

Notably, the company has rallied 14.5% in the past three months compared with the industry’s growth of 6.6%. Further, the Zacks Rank #2 (Buy) stock has gained 9.8% since reporting first-quarter 2020 earnings on Apr 27.

 



 

Factors Driving Performance

Keurig Dr Pepper looks well-poised amid the coronavirus pandemic, thanks to strength in its businesses. In the first quarter, the company’s top line primarily benefited from solid volume/mix benefits from the Packaged Beverages segment. The segment reported sales growth of 9.1% in the first quarter, driven by an 8.7% increase in volume/mix and 0.4% higher net price realizations. The segment’s volume/mix growth is mainly attributed to strength in premium water, carbonated soft drinks (CSDs), juice and apple sauce, partially driven by increased demand as consumers stocked-up beverages late in the quarter due to the coronavirus pandemic.

In the second quarter, sales in the Packaged Beverages segment is projected to remain flat, with sturdy performance in CSDs and juices, partly offset by weakness in premium water as well as the convenience and gas channel.

Meanwhile, the stay-at-home orders issued in March led to a change in consumers’ behavior regarding what they are buying and where they are buying. The company believes that these shifts may be lasting and continue post crisis. One such shift is the one to in-home consumption, which is likely to persist even after the crisis. The company notes that there has been strong growth in in-home coffee consumption due to the work-from-home trend and the inability to visit coffee shops. Consequently, single-serve coffee witnessed 9% growth for the 13-weeks ended Apr 27, while it increased 21% in the last four weeks of the same period.

Backed by the trends, the company is now focused on expanding the categories with opportunities and driving growth to offset the decline in others. Notably, its single-serve coffee category is witnessing growth, driven by a combination of the long-term trend of growing household penetration combined with an increase in consumption per existing brewer.

Moreover, the company expects sales for the coffee segment to be up in mid-single digits in the second quarter on the back of increased consumption in the at-home channels as more and more people are now working from home. This is likely to offset the declines in the away-from-home channels, which hurt results in the first quarter.

Given the uncertainty regarding the ongoing COVID-19 situation, Keurig Dr Pepper anticipates significant impacts on its 2020 results. Despite this, management reiterated its guidance for 2020, driven by a solid product portfolio and a robust distribution network. The company expects net sales growth to be at the lower end of 3-4% for 2020. However, it anticipates adjusted earnings per share of $1.38-$1.40, which suggest growth of 13-15%. Aggressive cost-containment actions, productivity improvement plans and gains from partnerships are expected to aid 2020 results.

Keurig Dr Pepper is displaying strength, with robust cash flow generation, which enables it to significantly pay down debt and offer shareholder value. In first-quarter 2020, it generated a free cash flow of $464 million, resulting in an impressive adjusted free cash flow conversion rate of 115%. Driven by the strong cash flow, it paid down structured payables of $107 million and reduced bank debt by $42 million in the first quarter. Moreover, the company is likely to stay afloat amid the coronavirus pandemic, with a strategic refinancing completed in April 2020 that extends its debt maturities and enhances liquidity profile. This included a $1.5-billion senior notes issuance and the refinancing and the doubling of its $750-million, 364-day credit facility to $1.5 billion of borrowing capacity.

Conclusion

Although the company expects significant impacts of the COVID-19 outbreak to persist, it provided a decent view for the year. Further, strong growth for the packaged goods and coffee segments are likely to be beneficial. In all likelihood, Keurig Dr Pepper, with a long-term earnings growth rate of 11.5% and a VGM Score of B, indicates further growth ahead.

3 Other Beverage Stocks You May Count on

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The Boston Beer Company, Inc. SAM has delivered a positive earnings surprise of 4.7%, on average, in the trailing four quarters. It currently sports a Zacks Rank #1.

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