Keurig Dr Pepper Posts Strong Sales in Q3 as Demand Stabilizes in Its Coffee Arm; Shares Rich

We don't plan to materially alter our $34 fair value estimate for narrow-moat Keurig Dr Pepper after digesting its third-quarter results. Net sales shot up 11.8% on a constant currency basis, with 12.1% contribution from pricing and a 0.3% downdraft from volume/mix, showcasing Keurig's stout pricing power. Despite the broad-based strength in its cold beverage portfolio, coffee systems segment (33.4% of sales) illustrated normalizing at-home coffee consumption. In this context, a 2.6% drop in volume/mix stemmed from an outsize 15% decline in brewer shipment (partially lifted by 3.5% pod shipment growth), largely attributable to mobility increase, per management. However, we view this mark a natural progression as pandemic-fueled demand subsides and we continue to expect incremental household penetration of 2 million annually, in line with historical run rates (a step down from 3 million in 2020 and 2021). Mirroring our view on wide-moats Coca-Cola and Pepsi, we don't think the current sales trajectory at Keurig is maintainable longer term, with our forecast calling for 5% average top-line growth through 2026 (two-thirds from pricing and the rest from volume/mix).