In the beverages/soft drinks industry with numerous headwinds and certain tailwinds, one of the leaders, Keurig Dr. Pepper Inc. (KDP) has received a consensus buy rating. Three equities covering the company have recommended a hold and the other three are a buy for the stock with a one-year price objective of $39.67.
Following the merger between Dr. Pepper Snapple and Keurig Green Mountain in 2018, KDP emerged as the first company to bring hot and cold beverages together at scale. With roughly 27,000 employees and annual revenue approaching $13 billion, the company is now set to join S&P 500 after the close of business on Friday, June 17, 2022. KDP will be replacing Under Armour Inc. in the Index. It also entered a long-term, exclusive sales agreement with Tractor Beverage Company in the foodservice channel. Tractor claims to be the first and only Certified Organic Non-GMO full line beverage solution for food service operators.
The hot and cold beverages company is continuously devising efficient marketing and product innovation strategies. Investments in boosting distribution platforms and e-commerce operations are expected to further increase household penetration and market share growth.
At the time of writing, the stock was trading at a price of $37.41 per share in the premarket on June 6, 2022. The stock gained 7.10% in the session after a decline of 1.10% in the prior.
KDP’s Financial Overview
In its latest earnings report for the first quarter of 2022, KDP came out with net sales of $3.08 billion. Coming above the consensus estimate of $3.02 billion, sales grew by 6.1% YOY due to strong growth of its Packaged Beverages, Beverage Concentrates, and Latin America Beverages. However, as per the company’s expectations, the Coffee Systems did see some decline. The in-market performance in Liquid Refreshment Beverages was sturdy with retail dollar consumption growing 9.9%. And, KDP gained market share in 87% of its cold beverages portfolio. A large strength was seen in CSDs3, coconut water, seltzers, teas, apple juice, and fruit drinks.
The bottom line advanced by 0.8% to $474 million in net income for Q1 2022 while EPS of 33 cents was flat YOY and in line with the consensus estimate. The supply chain hurdles and inflationary pressure had the adjusted operating income dip by 1.2%. This also caused a decline in adjusted gross margin by 280 basis points to 52.7% in the quarter.
At the end of the quarter, the company has cash and cash equivalents of $592 million while long-term obligations were $11,584 million. Its solid free cash flow of $632 million helped it reduce its total financial obligations by $350 million in the quarter.
Additionally, the company recently declared a regular quarterly cash dividend of $0.1875 per share on its common stock. The dividend will be paid to shareholders of record on July 1, on July 15, 2022.
Beverages Industry Trends & Highlights
The beverages/soft drinks industry has been having a tough time due to higher supply-chain costs like transportation and commodity costs, particularly steel and aluminum. These supply chain hurdles stem from the global supply chain constraints that rose during the pandemic and are now fueled by geopolitical instability along with China’s lockdowns. A further contributor is spiking inflation amid the vast economic turmoil that 2022 has been witnessing. Fuel prices are rising, and interest rates are even more so. Economies are falling as a recession looms overhead. Furthermore, the industry in concern is seeing huge spending on marketing and advertising as players are trying to capture a share in the recovering markets. Thus, the elevated operating and related costs are expected to continue straining margins in the near term.
On the other hand, industry dynamics are changing and trends are evolving with increased at-home consumption. Health consciousness and personal well-being have been gaining popularity recently as consumers focus more on themselves. Thus, a change in consumption patterns has arisen with increased spending on food and beverages that have more natural and organic ingredients. Soft drinks with less to no preservatives, added colors, low sugar content, and no artificial flavors, and sweeteners are gaining popularity. Hence, this brings forth a vast opportunity for companies to capitalize on. Moreover, a further boost is seen in the industry with the increased at-home consumption trend. While the away-from-home channel is also gaining, the at-home consumption is rising even after the pandemic lockdowns are now long gone. The at-home consumption is expected to have a continued share in the overall sales of the industry.
While there are a number of headwinds to the industry growth, KDP has been gaining traction due to the increasing trend of in-home consumption. Additionally, the increased focus on personal wellbeing also helped it boost sales and capture further market share in the healthy options, as seen in the Q1 report. Thus, despite the headwinds, analysts are bullish on the stock and have suggested a consensus buy as the company is expected to capitalize on the changing trends n the industry.