Analyst Note| Rebecca Scheuneman, CFA |
As we anticipated, narrow-moat Keurig Dr Pepper increased its long-term organic sales expectations at its investor day meeting, to mid-single-digit growth from 2%-3% previously. As our model already incorporates 4% average annual organic sales growth over the next five years, we do not expect a material change to our $30.50 fair value estimate, leaving the shares modestly overvalued. We also remain comfortable with our five-year average annual earnings per share growth of 8.5%, which aligns with management’s high-single-digit guidance. We expect operating margins to exceed 26% by 2025, up from 21% in 2020, as supply chain productivity, more favorable raw material procurement, and administrative cost savings should more than offset negative product mix and pricing moderation in company-owned brands. In the near term, like its peers, Keurig Dr Pepper is experiencing steep inflation in materials, labor, and transportation, which it should fully offset in time with price increases, efficiency savings, and revenue management tools. Even so, delays in the implementation of these mitigating factors could lead to near-term margin volatility.