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Balanced Risk-Reward for Keurig Dr Pepper: Stock Up 18% YTD

Zacks Equity Research

Keurig Dr Pepper Inc. KDP displayed immense strength, driven by robust retail market performance, with market share gains across all categories. Further, the company’s strategy focused on partnerships and acquisitions bodes well for long-term growth. These efforts have not only aided quarterly outcome but also boosted the share price, with gain of 18.7% recorded in the year-to-date period. This performance is well ahead of the industry’s growth of 13.1% for the same period.

 


However, like many in the industry, Keurig Dr Pepper is battling headwinds related to the CSD category and higher input costs, particularly for aluminum cans. These along with adverse effects of changes made in its Allied Brands portfolio, negative comparisons resulting from a calendar shift this year and negative currency translations have been impacting the company’s top line. With these headwinds likely to continue through the rest of the year, let’s see how this beverage and coffee company will retain stock momentum.

Factors Favoring the Stock

We believe the aforementioned initiatives should provide enough support to maintain momentum in the Keurig Dr Pepper stock. Going into details, the company 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 two partner brands to its owned portfolio.

Keurig Dr Pepper 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 with the help of its network of convenience stores.

The company recently signed a long-term agreement to sell, distribute and merchandise the Evian brand across the United States. It also added the iconic Canadian coffee brand, Tim Horton’s, and 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 distributing in 2020. Meanwhile, Keurig Dr Pepper exited FIJI Water and BODYARMOR drink brands as part of the recent reorganization of its allied brands.

Coming to market share gains, the company reported dollar consumption growth across the majority of its portfolio and KDP holding in the first quarter, with market share gains across all categories. Market share growth in its CSD premium unflavored still water, RTD coffee and shelf stable apple juice portfolios were backed by strength in Dr Pepper and Canada Dry CSD brands, CORE waters, Peet's and Forto RTD coffees, and Mott's apple juice. Further, retail consumption for the single-serve pods manufactured by KDP rose almost in line with category unit growth of 5%.

These gains aided the company’s bottom line, which beat estimates and improved year over year in the first quarter. This marked the second beat in the last three quarters.

Looking at the future, Keurig Dr Pepper remains on track with long-term targets set out at the time of the merger in July 2018. It continues to anticipate adjusted earnings per share growth of 15-17% in 2019, in line with the long-term target for the 2018-2021 period set at the time of the merger. This brings the company’s adjusted earnings per share guidance to $1.20-$1.22 for 2019. The earnings view for 2019 is supported by net sales growth of about 2%, in line with Keurig Dr Pepper’s long-term sales growth target of 2-3%.

It anticipates capturing merger-related synergies of nearly $200 million in 2019, consistent with the long-term target of capturing $200-million synergies every year between 2019 and 2021. Additionally, the company 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.

Factors Hindering Growth

Keurig Dr Pepper is no exception to the headwinds arising from sluggish CSD category trends and currency headwinds in the soft-drinks industry. Further, high input costs mainly due to rise in tariffs for aluminum has been hurting the company’s performance. Though it witnessed operating margin growth in the fourth quarter, higher input and logistic costs slightly offset results.

Additionally, Keurig Dr Pepper displays a dismal sales history, which persisted in first-quarter 2019. The company missed sales estimates in three of the last four quarters. Sales also declined year over year in the first quarter due to 2.5% adverse effects of changes made in its Allied Brands portfolio, 0.6% negative comparisons resulting from a calendar shift this year and 0.5% negative currency translations. Notably, all of the company’s segments reported sales growth except for the Packaged Beverages segment due to the effects of the aforementioned changes in the Allied Brands portfolio and the calendar shift.

Conclusion

The above discussion clearly shows that Keurig Dr Pepper has balanced risk-reward, with its progress on efforts likely to offset hurdles. Further, its Zacks Rank #3 (Hold) and expected long-term earnings growth rate of 15.4% speak well of its growth potential.

Don’t Miss These Better-Ranked Beverage Stocks

Monster Beverage Corp. MNST has a long-term earnings growth rate of 14.3%. The stock presently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

PepsiCo Inc. PEP, with long-term earnings per share growth rate of 7%, currently carries a Zacks Rank #2.

Constellation Brands Inc. STZ, with long-term earnings per share growth rate of 8.6%, also carries a Zacks Rank #2 at present.

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