Company Reports

We don’t plan any material changes to our $32 fair value estimate for narrow-moat Keurig Dr Pepper after absorbing its first-quarter results. Sales were up 3% and adjusted EPS up 12%, both led by strength in the ready-to-drink beverages while coffee remains a drag. We see no need to change our 2024 forecasts for sales and adjusted EPS to grow 3.4% and 8.5%, respectively. And our 10-year estimates for mid-single-digit sales CAGR and operating margins averaging in the low 20s remain in place. We view shares as fairly valued following a 4% pop after earnings.

We award a narrow Morningstar economic moat rating to Keurig Dr Pepper and expect the firm to deliver excess returns aided by intangible assets and scale benefits in its soft drink portfolio and entrenched retail and brand partner relationships in its coffee systems business for the next 10 years at least.

We plan to maintain our $32 fair value estimate on narrow-moat Keurig Dr Pepper after absorbing its 2023 earnings results, including adjusted EPS of $1.79 that topped our $1.78 estimate despite 5.4% sales growth that missed our 5.7% projection. While ready-to-drink beverages continued to deliver healthy growth on product innovation and expanding category exposure via distribution partnerships, coffee remained a drag given sluggish K-cup demand and a more promotional environment, reinforcing our concern about the segment's long-term prospects. We maintain our 10-year estimates for mid-single-digit sales CAGR and operating margins averaging in the low 20s, and view shares as fairly valued.

We award a narrow Morningstar economic moat rating to Keurig Dr Pepper and expect the firm to generate excess returns aided by intangible assets and scale benefits in its soft drink portfolio and entrenched retail and brand partner relationships in its coffee systems business for the next 10 years at least.

Narrow-moat Keurig Dr Pepper held refreshment beverage volume steady following price hikes, but its coffee business disappointed, posting a third consecutive quarterly sales decline this year and reinforcing our concern about the segment’s long-term prospects. Total sales grew 5% (up 6% in beverage but down 3% in coffee) while adjusted EPS rose 4%, both in line with our estimates. As we taper our expectations for coffee sales growth (5% currently) over the 10-year horizon, we plan to trim our $35 fair value estimate by a low-single-digit percentage and view shares as fairly valued.

Narrow-moat Keurig Dr Pepper today unveiled its CEO succession plan, with the appointment of consumer packaged goods veteran Tim Cofer to the COO role effective in November and the arrangement for him to take the top job from current CEO Bob Gamgort in the second quarter of 2024. We believe Cofer’s CEO experience at publicly listed Central Garden & Pet, and his 25 years of executive roles at wide-moat Mondelez International and predecessor Kraft Foods overseeing business operations, distribution, and strategic integrations, have prepared him well to lead Keurig Dr Pepper in its quest to grow faster and solidify its competitive position in beverage and coffee. We don’t expect any material change in the firm’s growth roadmap or capital allocation priorities, as long-time executive Bob Gamgort will retain the executive chairman role. As such, we are maintaining our Standard Capital Allocation Rating and our $35 fair value estimate. Shares trade in a range we’d consider fairly valued.

We award a narrow Morningstar economic moat rating to Keurig Dr Pepper and expect the firm to generate excess returns aided by intangible assets and scale benefits in its soft drink portfolio and entrenched retail and brand partner relationships in its coffee systems business for the next 10 years at least.

We plan to maintain our $34 fair value estimate on narrow-moat Keurig Dr Pepper after digesting second-quarter results (organic revenues up 6.1% and adjusted EPS up 7.7%) that matched our forecasts. Our 10-year estimates for mid-single-digit sales growth and low 20s operating margins remain in place. Following a 4% pop on the report, shares trade in a range we'd consider fairly valued.

We don't expect to change our $34 fair value estimate for narrow-moat Keurig Dr Pepper following its announcements of long-term distribution agreements with premium coffee maker La Colombe in conjunction with a $300 million equity investment for a 33% stake in the firm. Specifically, Keurig Dr Pepper will distribute La Colombe-branded ready-to-drink coffee starting in late 2023 and manufacture and distribute K-cup pods for the brand in 2024 onward. While we believe the agreement and equity investment make strategic sense, the bump to earnings will likely remain immaterial over the next several years given strong entrenched players in the coffee aisle and the small size of La Colombe. We continue to view shares as fairly valued, and our Standard Morningstar Capital Allocation Rating remains in place.

We are maintaining our $34 fair value estimate on narrow-moat Keurig Dr Pepper after digesting its first-quarter results (revenue up 8% and adjusted EPS up 3%) that match our forecasts and view the shares as fairly valued.

We award a narrow Morningstar economic moat rating to Keurig Dr Pepper and expect the firm to generate excess returns aided by intangible assets and scale benefits in its soft drink portfolio and entrenched retail and brand partner relationships in its coffee systems business for at least the next 10 years.

We are maintaining our $34 fair value estimate on narrow-moat Keurig Dr Pepper after digesting its fourth-quarter results ($3.8 billion in sales and $0.50 in EPS) and 2023 outlook (constant-currency sales and adjusted EPS growth at 5% and 6%-7%, respectively) that match our estimates. The shares are fairly valued. We continue to view the beverage portfolio (65% of 2022 sales) as in good shape thanks to strong brands (the source of its moat) and category diversification beyond soda. However, the firm’s update confirmed our suspicion that its coffee business will require more investment in customer acquisition and retention to shore up its growth prospects, thus limiting margin upside.

We award a Narrow Morningstar Economic Moat Rating to Keurig Dr Pepper and expect the firm to generate excess returns aided by intangible assets and scale benefits in its soft drink portfolio and entrenched retail and brand partner relationships in its coffee systems business for at least the next 10 years.

Despite cost inflation and macroeconomic headwinds that may impede consumer spending, we continue to believe narrow-moat Keurig Dr Pepper is equipped to navigate the uncertainties on the horizon. We see the company benefiting from an advantaged position in the ready-to-drink beverage aisle (60% of business), given its stout brand portfolio (which underpins strong pricing power and close retail relationships amid secular headwinds driven by health consideration) and distribution clout supported by an integrated and technology-enabled logistics and warehouse network. Our confidence level dips a notch in its coffee system arm, though, due to the prospect of competition heating up and potentially eroding the long-term durability and value of the Keurig ecosystem, a key moat source. That said, we believe the company has tools at its disposal (stepped-up spending in research, development, and marketing and investments in a digitized supply chain and retail relationship) to support its position.

Narrow-moat Keurig Dr Pepper’s C-Suite changes continue, with its current executive chairman and former CEO Bob Gamgort set to reassume the CEO role as Ozan Dokmecioglu steps down from the position after just four months. This abrupt CEO departure is attributable to Dokmecioglu’s violation of company’s code of conduct, and we view the firm's decision as favorable, based on its decisive action to uphold its ethical policies, in line with Sustainalytics’ strong rating for the management of ESG risks. We’ll await formal investigation results to opine on the efficacy of the firm’s candidate vetting process, to the extent that violations could have occurred prior to the promotion. Ultimately, we expect the transition to go smoothly, given Gamgort’s four years in the CEO role since the 2018 merger and his prior position as the CEO of Keurig Green Mountain.

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).

The merger of Keurig Green Mountain and Dr Pepper Snapple into Keurig Dr Pepper created a North American beverage behemoth with strong brands and supply chain positioning. Despite being only one third and one sixth the size of Coke and Pepsi, respectively, Keurig Dr Pepper appears poised to augment the positioning of its cold business (60% of sales). However, it will have a more difficult time navigating various structural headwinds plaguing its hot business.

In parallel with wide-moat Pepsi and Coke, narrow-moat Keurig Dr Pepper delivered solid volume/mix growth across operating segments, indicating that inflation is not threatening these moaty beverage businesses’ growth trajectories. Net sales shot up 13.5% in the quarter, with 10.4% contribution from the net price realization and 3.1% lift from volume/mix. In the coffee systems segment (34% of sales), which remains one of the most salient growth vectors, in our view, we continue to expect stable incremental household penetration (in line with the annual run rate of an additional 2 million households), aided by pod and brewer offerings at multiple price points, the firm’s commitment to increasing marketing spend, and partnerships with other brands. Competing in categories manifesting resilience during economic downturns (largely coffee and carbonated soft drink, per management), Keurig Dr Pepper should yield mid-single-digit top-line growth long term in our view, helped by both volume/mix and price.

The merger of Keurig Green Mountain and Dr Pepper Snapple into Keurig Dr Pepper created a North American beverage behemoth with strong brands and supply chain positioning. Despite being only one third and one sixth the size of Coke and Pepsi, respectively, Keurig Dr Pepper appears poised to augment the positioning of its cold business (60% of sales). However, it will have a more difficult time navigating various structural headwinds plaguing its hot business.

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.