Keurig Dr Pepper (NASDAQ: KDP ) reported its Q4 results last week, broadly in line with Street estimates. The company reported revenue of $3.9 billion and adjusted earnings of $0.55 per share compared to the consensus estimates of $3.9 billion in sales and $0.54 earnings per share. The company continued to benefit from price gains while volume declined during the quarter. KDP stock has declined more than 15% in the last twelve months and we believe it is now undervalued. In this note, we discuss Keurig Dr Pepper’s stock performance, key takeaways from its recent results and valuation.
KDP shares have seen little change, moving slightly from levels of $30 in early January 2021 to about $30 now, versus a rise of about 35% for the S&P 500 over this roughly three-year period. Overall, the performance of KDP stock with respect to the index was lackluster. Returns for the stock were 15% in 2021, -3% in 2022, and -7% in 2023. By comparison, returns for the S&P 500 were 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that KDP underperformed the S&P in 2021 and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – it’s been tough over the past few years for individual stocks; for heavyweights in the Consumer Staples sector including PG, COST and KO, and even for the mega-cap stars GOOG, TSLA and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 every year during the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less roller coaster ride as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and high interest rates, could KDP face a similar situation as it did in 2021 and 2023 and underperforms the S&P over the next 12 months – or will it see a sharp jump? From a valuation perspective, KDP stock looks like it’s undervalued. We value The Keurig Dr Pepper rating to be $38 per share, reflecting more than 25% upside from its current levels of $30. Our forecast is based on a 20x P/E multiple for KDP and expected earnings of $1.93 on a per-share and adjusted basis for the full year 2024. The 20x P/E ratio is in line with the stock’s average over the past five years.
Keurig Dr Pepper’s revenue of $3.9 billion in Q4 grew 1% on a constant currency basis, driven by a 5% price gain, partially offset by a 4% lower volume/mix. Looking at segments, US Refreshment Beverages sales were up 7%, the international segment’s revenue was up 11%, while the US Coffee segment saw a 10% year-over-year decline in sales. Keurig Dr Pepper’s adjusted operating margin rose 150 bps yoy to 28.5% in Q4. Higher revenues and margin expansion led to a 10% increase in the bottom line, which stood at $0.55 on an adjusted basis. Looking ahead, Keurig Dr Pepper expects adjusted sales to rise in the mid-single digits and adjusted earnings per share to increase in the high single digits in 2024.
Although price growth may moderate in the coming quarters, the company has been able to expand its margins and is working to revive coffee sales in the United States. The new product launch in the beverage segment will boost its overall sales growth. We think investors can use the current decline in KDP stock for robust gains in the long term.
While KDP stock appears to be undervalued, it’s useful to see how The companions of Keurig Dr Pepper rate on metrics that matter. You’ll find other valuable comparisons for companies across industries at Same Comparisons.
returns | February 2024 MTD (1) |
From the beginning from 2023 (1) |
2017-24 Total (2) |
KDP Return | -6% | -17% | -67% |
S&P 500 Return | 5% | 33% | 127% |
Hit Enhanced Value Portfolio | 3% | 42% | 627% |
(1) Returns as of 2/27/2024
(2) Cumulative total profit since the end of 2016
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.