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Keurig Dr Pepper Gains on Robust Portfolio: Can It Sustain?

Zacks Equity Research
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Keurig Dr Pepper Inc. KDP is displaying solid momentum since the completion of the collaboration of Keurig Green Mountain and Dr Pepper Snapple Group Inc. The company is witnessing market share gains across several categories, which have been driving its performance. In addition, Keurig Dr Pepper undertakes partnerships and acquisitions, which form an important part of its growth strategy. Management anticipates capturing merger-related synergies of nearly $200 million in 2019.

All these factors helped the company to deliver robust earnings surprise trend, which also continued in second-quarter fiscal 2019. Notably, this marked its third bottom-line beat in the last four quarters. Further, the projected earnings and sales growth for 2019 is estimated to be within the company’s long-term target, which was set at the time of the merger. (Read: Keurig Dr Pepper Q2 Earnings Beat, Sales Lag Estimates)

Notably, the stock has gained 17.4% in the past year, outperforming the industry’s growth of 2.4%. Moreover, the Zacks Rank #3 (Hold) company’s impressive long-term earnings growth rate of 15.4% indicates that the stock’s momentum is likely to continue.

All said, let’s take a closer look at the aspects that are driving the company’s performance.

Let’s Delve Deeper

Keurig Dr Pepper is witnessing strong in-market performance across most of the business, which is clear from the market results based on IRI. In the second quarter, it reported dollar consumption growth, with market share gains across the majority of its portfolio category.

The company experienced market share growth in CSD's3, single-serve coffee, shelf-stable fruit drinks, unflavored still water and RTD3 coffee categories. This was backed by strength in Dr Pepper and Canada Dry CSD brands; Peet's, CORE Hydration and Forto RTD coffees; and Snapple juice. Further, in coffee, retail consumption for single-serve pods manufactured by KDP rose nearly 5% while dollar market share was in line with the prior year’s 81.6%.

Moreover, within its partnership and acquisition strategy, the company acquired Big Red and has agreed to acquire CORE Hydration, adding the two partner brands to its owned portfolio. It also added Forto Coffee Energy Shots as a new partner and expanded distribution terms with Peet's for ready-to-drink Iced Expresso. It will distribute Forto throughout its network and Peet's, primarily through its network of convenience stores.

Additionally, it has in place 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 United States-based bakery-cafe brand, Panera, as Keurig partners. It also signed an agreement with Met café in Canada, which was an unlicensed brand previously, and will begin distributing in 2020. Meanwhile, Keurig Dr Pepper exited FIJI Water and BODYARMOR drink brands as part of the recent reorganization of its allied brands. These alliances and acquisitions have significantly contributed to its earnings in the past few quarters.

Apart from the aforementioned factors, Keurig Dr Pepper’s bottom-line results have been benefiting from higher adjusted operating income and a considerable decline in interest expenses due to reduced indebtedness and unwinding of several interest rate swap contracts. Further, a lower tax rate is aiding its earnings. Notably, the company reduced outstanding debt by $717 million in the first six months of 2019, driven by strong operating performance and effective working capital management.

Wrapping Up

However, it continues to witness a setback due to soft top-line trends, stemming from adverse effects of changes made in its Allied Brands portfolio and negative currency translation. Apparently, the company’s sales lagged estimates in four of the last five quarters. These factors also weighed on the Packaged Beverages segment’s top line. Additionally, industry-wide headwinds related to the CSD category and higher input costs continue to linger.

Rising raw material costs, specifically aluminum, have been hurting the company’s performance. Although it witnessed operating margin expansion in the second quarter, the same was slightly offset by inflation, particularly in packaging and manufacturing input costs.

Nevertheless, we expect all aforementioned growth drivers to offset these hurdles and help Keurig Dr Pepper to sustain its solid momentum.

3 Better-Ranked Beverage Stocks

The Coca-Cola Company KO has an expected long-term earnings growth rate of 6.8% and a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Fomento Economico Mexicano S.A.B. de C.V. FMX, with a long-term earnings growth rate of 15.8%, currently carries a Zacks Rank #2.

The Boston Beer Company, Inc. SAM presently has an expected long-term earnings growth rate of 10% and a Zacks Rank #2.

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Click to get this free report The Boston Beer Company, Inc. (SAM) : Free Stock Analysis Report Fomento Economico Mexicano S.A.B. de C.V. (FMX) : Free Stock Analysis Report Coca-Cola Company (The) (KO) : Free Stock Analysis Report Keurig Dr Pepper, Inc (KDP) : Free Stock Analysis Report To read this article on Zacks.com click here.