1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Jonathan Poland
Jonathan Poland
Articles (505)  | Author's Website |

Risk Reward With the New Keurig Dr Pepper

With the merger complete, the stock still faces uphill battles

July 10, 2018 | About:

As previously announced, under the terms of the agreement, Dr Pepper Snapple shareholders received a special cash dividend of $103.75 per share, payable today in U.S. dollars to shareholders of record on July 6. Keurig shareholders now hold 87% and Dr Pepper Snapple shareholders hold 13% of the new company at an implied market cap around $30 billion.

The combined organization is set to generate $11 billion in sales and close to $2 billion in net income. Keurig Dr Pepper hopes to realize $600 million in cost savings on an annualized basis by 2021 and is looking to deliver an annual dividend of $0.60 per share, roughly 3% on today’s market price. At the same time, the company’s total net debt at closing will be $16.6 billion, putting massive pressure on the shares. In 2015, Green Mountain had $1.41 billion in total liabilities. At the end of its latest quarter, Dr Pepper had $7.69 billion in total liabilities. That extra $7.5 billion almost doubles the new entity’s liabilities and punishes shareholders equity.

JAB Holdings, a privately held German conglomerate with its HQ in Luxembourg, led the initial $13.9 billion buyout of Keurig back in 2016, paying $92 per share in cash. JAB is also the owner of Panera Bread, Caribou Coffee, Peet’s Coffee and Krispy Kreme, so merging one of its biggest brands Keurig with Dr Pepper seems dubious.

Since going private, Keurig has further penetrated the US market, increasing its position by 17% in the last two years, while reducing the cost of its pod prices and growing that segment by mid-single digits in 2017. The JAB led Keurig also improved operating income and increased its operating margin in the last two years thanks to its significant productivity improvement programs. However, only time will tell if these measures hold up to scrutiny of the public markets.

At the same time, despite the new added debt, the company’s brands are top shelf. It’s really just Pepsi, Coke, Dr Pepper in the drink aisle and now with Keurig, the company can build on its durable competitive advantage. The merger will create a portfolio of roughly 250 brands that are either owned, licensed or allied with other companies. Coca-Cola is priced at $190 billion in the market, PepsiCo at $157 billion.

If Keurig Dr Pepper earns around $2 billion in 2019, the market cap could rise to a level between $40 billion and $60 billion depending on how investors respond to this deal. That’s a margin of safety that’s worth the risk.

Disclosure: I am not long/short any stock mentioned in this article.

About the author:

Jonathan Poland
I spent more than 15 years helping DIY investors earn over 30% a year. Today, I help business leaders take those insights and build better assets. I rarely write about stocks that I own. Thanks for reading. Do your own analysis before investing.

Visit Jonathan Poland's Website

Rating: 5.0/5 (1 vote)



Mikestocks - 1 year ago    Report SPAM

Thank you for the great article. This has helped me learn a lot more about this investment opertunity. Planning to add more and see where this goes. Thank you

Please leave your comment:

Performances of the stocks mentioned by Jonathan Poland

User Generated Screeners

pascal.van.garsseHigh FCF-M2
kosalmmuseBest one1
DBrizanall 2019Feb26
kosalmmuseBest one
DBrizanall 2019Feb25
MsDale*52-Week Low
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat