Keurig Dr Pepper (KDP, Financial) is one of the largest beverage companies in North America and the first to bring hot and cold beverages together at major scale with the 2018 merger of Keurig Green Mountain and Dr Pepper Snapple Group.
The company has annual revenues in excess of $14 billion and employees nearly 27,000 workers. It offers over 100 hot and cold beverages with iconic brands such as Dr Pepper, 7-Up, Canada Dry, Hawaiian Punch and Motts. The coffee segment provides specialty coffee and other hot beverages in single-serve K-Cup pods under brands such as Green Mountain, Krispy-Kreme, Donut Shop, Tulleys and Swiss Miss.
The company has a long history. Dr Pepper was first major carbonated soft drink in America after being founded in 1885, which predates Coca-Cola (KO, Financial) and Pepsi (PEP, Financial). With its origins in Waco, Texas, Dr Pepper is currently ranked as the fifth largest soft drink brand in the U.S.
Despite the long and storied history, I consider Keurig Dr Pepper to be a growth stock. The company is expected to generate over $14 billion in revenues this year according to analysts' estimates. While it does face temporary issues from cost pressures, I believe the company can overcome and achieve long-term success.
Covid-19 impact
Keurig Dr Pepper benefited somewhat from the pandemic-accelerated work from home phenomenon as people purchased coffee machines and K-Pods when they no longer had access to their in-office coffee machines. Many were also unwilling to go hang out in cafes due to the virus. During this period, the company estimates that it attracted 6 million additional households who purchased a K-Pod machine and bought the company’s variety of K-Pod offerings. Now, as many companies are returning employees to offices, this tailwind is disappearing.
Financial review
The company's most recent results were for the second quarter, in which net sales increased 13.2% to $3.5 billion compared to $3.1 billion in the prior-year period. This increase reflected balanced growth in all company segments, with both pricing and volumes increasing in the quarter. Price increases represented 10.4% and sales volume increased 3.1%. Cold beverages led the growth, increasing 9.9%, and coffee pod sales increased 3.8%.
Adjusted operating income declined in the quarter to $832 million, with an operating margin of 23.4%. Gross profits increased 10%, but this was offset by inflationary pressures in transportation and warehousing as well as increased retail labor costs.
Cash on the balance sheet stood at $552 million and total debt obligations were $11.6 billion. With expected Ebitda of approximately $4.2 billion this year, the company’s forward leverage ratio is roughly 2.6.
Valuation
Keurig Dr Pepper recently raised its full-year 2022 top-line guidance, which calls for constant currency net sales growth in the low-double-digit range, and reaffirmed its guidance for adjusted earnings per share growth in the mid-single-digit range.
Consensus analyst EPS estimates are $1.69 for 2022 and $1.85 for 2023. Over the past three-year period, the company has grown its revenue around 9.4% per year and its EPS without non-recurring itmes by 41.5%, so the company has been considered a growth stock for quite some time, and price-earnings ratios above 20 are not unusual. The company’s forward enterprise-value-to-Ebitda ratio is also elevated at approximately 15.
Using the GuruFocus discounted cash flow calculator, I plugged in an EPS starting point of $1.69 and a 10% long-term growth rate, which creates a fair value estimate below the stock price as of this writing.
The company also pays an annualized dividend of $0.80 per share, which currently equates to a 2.16% dividend yield.
Guru trades
Gurus who have purchased Keurig Dr Pepper stock recently include Joel Greenblatt (Trades, Portfolio). Gurus who have reduced or sold out of their positions include Mario Gabelli (Trades, Portfolio) and Robert Olstein (Trades, Portfolio).
Conclusion
Keurig Dr Pepper appears to be managing this difficult environment well despite short-term potential headwinds from the return to office trend. The adoption rate for Keurig brewers and K-Pods is still relatively low when compared to the entire coffee industry in North America. According to Statista, only 27% of coffee consumers utilize a single cup brewer as of January 2022, which leaves plenty of room for market share growth.
Although a lower entry point may be necessary to create a margin of safety for value investors, the growth runway for the company appears to impressive over the long term.
