Key points
- Keurig Dr Pepper had a mixed quarter, sending stock prices searching for market support: Support has been found, but will it hold?
- In the mix is weaker-than-expected guidance: the guidance calls for top-line and bottom-line growth.
- Capital returns, including dividends and share buybacks that reduce share counts, help support the market: Analysts’ price targets imply a deep value play.
- 5 Stocks We Like Better Than Keurig Dr Pepper
Keurig Dr. Pepper’s NASDAQ: KDP the stock price fell following its fourth quarter results and 2024 outlook, creating the next buying opportunity. The market is down but aligning with an underlying pattern as the business reaches an inflection point. Coffee remains a weak spot and guidance isn’t strong, but it points to continued growth and wider margins, which matter more to investors. Growth and wider margins align with the outlook for capital returns and equity earnings and will ultimately support the market.
There is a possibility that KDP stock will fall between then and now, but a bottom is in sight. The stock bottomed and rebounded significantly ahead of the third quarter release, setting a low for the market supported by analyst sentiment. Analysts may scale back their targets now that the guidance is in place, but the downward revisions are unlikely to alter the value proposition offered by Keurig Dr Pepper. Trading at current levels near $30.30, it is about 1000 basis points below the analyst’s lowest price target and 22% below consensus.
Keurig Dr Pepper has a mixed quarter; provides cautious guidance
Keurig Dr. Pepper had a mixed quarter compared to consensus estimates. The company’s $3.87 billion was up 1.8% from last year, but missed consensus, while margins remained impressive. The top line loss is small, about 100 basis points, and easy to overlook due to the stock’s value, yield, and stock gains.
Segmentally, coffee remains the weak link, down 5.4% year over year and 9% in the fourth quarter. It is affected by the post-pandemic industry normalization; we no longer drink coffee at home like we did two years ago, but business will soon normalize. The company expanded its segment reach during the quarter, increasing the number of households using its product and improving its margin. U.S. and international soft drinks grew 9.1% and 15%, respectively, to match PepsiCo NASDAQ:PEP AND That of the Coca-Cola Company NYSE: KO results.
The news on margins is good. The company expanded its gross and operating margin to achieve profit outperformance. The margin improvement is centered on cost control and higher realized prices, which increased 4.8% year over year. GAAP earnings grew 53%, helped by one-time items in comparisons, while adjusted earnings grew 10%, beating consensus by a cent.
Keurig Dr Pepper’s cash flow generates shareholder value
Keurig Dr Pepper generated enough cash flow in fiscal 2023 to pay dividends and repurchase shares while improving the balance sheet. The dividend is worth 2.75%, with shares close to $30.50 and reasonably safe at 60% of earnings, in line with competitors PEP and KO. The difference is a slightly higher yield with PEP and KO for higher payouts and P/E ratios. Everyone is increasing their distributions, but KDP is rapidly increasing its payouts and is priced at discount levels.
Repurchase activity has reduced the number of shares by 1.8% and is expected to continue into 2024. The balance sheet has debt, but leverage is low, less than 0.5%, and equity capital is increasing , up 2.2% year-on-year.
Technical Outlook: Keurig Dr Pepper Falls to Support; it could pop up higher
The KDP market is a spring ready to relax. The market is volatile but is bottoming and may already be at support. The daily chart shows some support at the $30 level, in line with a distorted Head and Shoulders pattern. This pattern could produce a significant rebound soon and take the market back to $32 or higher in the coming weeks or months. If not, the next target for solid support is near $28 and could be reached quickly. In this scenario, the market will likely collapse through the support near $28, but this is not expected.
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