Narrow-Moat Keurig Dr Pepper Pours Out Strong Sales, but Shares Remain Expensive

We do not anticipate making any material changes to our $32 fair value estimate for narrow-moat Keurig Dr Pepper after reviewing its first-quarter results, with sales a bit ahead of our expectations on better pricing, offset by lower-than-expected gross margins, given ongoing inflationary pressures. Net sales for the quarter grew 6.1%, with pricing contributing 6.3%, and volumes declining 0.2%. First-quarter revenue checked in at $3.1 billion, tracking a bit ahead of our full-year estimate of $13.4 billion, given typical seasonal patterns. The strong first-quarter sales figures prompted management to increase full-year sales growth guidance to a high-single-digit percentage, from mid-single-digit previously (due to the successful pricing actions). Given lags in implementing price increases and cost savings to counteract inflation, first-quarter adjusted gross and operating margins fell 280 and 170 basis points respectively, to 52.7% and 23.8%. With this, we plan to make a modest reduction to our full-year gross margin estimate.