Keurig Dr Pepper to increase by 15%

Despite rising nearly 45% from the lows in March this year, at the current price of around $ 28 per share, we believe Keurig Dr Pepper broth (NYSE: KDP) is still undervalued. KDP stock has risen from less than $ 20 to just over $ 28 from the recent low, slightly less than the S&P which is up 50% from its recent lows. Even though the stock is about 15% above where it was at the end of 2018, it remains below its pre-Covid (February 2020) high of $ 29.50. We believe KDP’s inventory could increase by around 15% from its current level, due to expectations of growing demand and an easing of supply constraints following the gradual lifting of lockdowns. Our dashboard What factors caused Keurig Dr Pepper’s stock to fluctuate by 15% between 2018 and now? has the underlying numbers.

Part of the increase in the share price between 2018 and 2019 is accounted for by the 50% increase in KDP revenue. This increase is mainly due to the acquisition of Dr Pepper Snapple by Keurig Green Mountain which led to the formation of Keurig Dr Pepper. This effect was further accentuated by a 43% increase in the net profit margin, which rose from 7.9% in 2018 to 11.3% in 2019. Per share, profit increased by 65%, from 0 , $ 54 to $ 0.89, with shares outstanding also rising due to the shares. of the two merged companies.

KDP’s P / E multiple fell sharply from 46x to 32x during this period. This is not due to a change in the fundamentals of the company but to the sharp rise in EPS following the acquisition. The share price only increased at a modest pace between December 2018 and December 2019, as the effect of the acquisition was factored into the price, causing the P / E to fall. Despite the coronavirus pandemic that hit the world in 2020, KDP has been almost immune to the current crisis, as evidenced by its current P / E multiple of 32x, similar to 2019 levels.

Where is the stock going?

The global spread of the coronavirus in early 2020 affected industrial and economic activity, which affected consumption and consumer spending. However, the KDP has not been affected much by the pandemic. This is clear from the recently released second quarter 2020 results for the company. Keurig Dr Pepper’s income was $ 2.86 billion, up 1.8% year-on-year.

What has helped KDP outperform the market? It is the company’s revenue mix. Just 13% of KDP’s total revenue comes from concentrates (which are sold to subsidiaries that manufacture syrups used in fountain drinks). Home quarantine and containment are translating into a sharp drop in sales of fountains and a corresponding drop in demand for concentrates. But KDP, which derives 44% of its revenue from bottled beverages (ending up in grocery and convenience stores) and 38% of sales from Keurig brewing systems and K-Cups, directly benefits from the increase. sudden in-home consumption, with manageable exposure to declining concentrate sales. As people move away from carbonated drinks and replace them with drinks like coffee, KDP has an edge over rivals Coca-Cola and PepsiCo as its coffee segment (38% revenue share) will grow as its coffee segment (38% revenue share) grows. millions of people work from home to benefit from the company’s direct and licensed K-Cup coffee sales. Additionally, KDP’s revenue is concentrated in the United States and Canada, with its only international division – Latin America – accounting for just 5% of revenue. This has helped KDP suffer less from global supply chain disruptions due to Covid-19 compared to companies like Coca-Cola which have a global distribution system.

As the global bottlenecks are gradually lifted, the business of the company is expected to grow even faster, as demand is expected to increase. In addition, management reaffirmed its outlook for the full year 2020. The company outperformed its peers in the food industry and investor attention shifted to the 2021 figures. Thus, the pursuit of revenue and profit growth with a high P / E multiple is expected to result in an increase of approximately 15% in KDP stock. According to the Trefis analysis, Valuation of Keurig Dr Pepper comes down to $ 33 per share.

For more information on the food industry, find out why we believe Keurig Dr Pepper is better placed than Coca-Cola while you can see a benchmarking of PepsiCo vs. Coca Cola

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Alice P. Darby