Keurig Dr Pepper (KDP:NASDAQ) $33.75

Loss to date: -3.8%

We added soft drinks and coffee maker Keurig Dr Pepper (KDP:NASDAQ) to our Great Ideas list in March 2023 at $35.07, noting its valuation had slipped behind those of its peers despite a diverse brand portfolio, resilient earnings and generous shareholder returns.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

While the shares are yet to gain much traction, our view has recently been endorsed by analysts at UBS. Describing a situation where a decline in earnings power at the business is being priced in
as ‘misplaced’, instead they see the potential for a shift in momentum provided by the company’s US Coffee arm.

The business distributes coffee brewers and single-serve coffee pods under the Keurig and Green Mountain brands and produces Dr Pepper as well as drinks brands like Snapple, Canada Dry and Sunkist.

Forecasting high single-digit earnings per share growth in 2024, UBS notes the shares trade at a 32% discount to the ratings of their US beverage peers.

On 28 July, the company reported quarterly earnings ahead of expectations and forecast higher annual sales thanks to its pricing power.

The Texas-based outfit said it expects sales growth of between 5%-6% in 2023 compared with a previous projection of 5% and reiterated its forecast of adjusted earnings per share growth of 6%-7% after second-quarter earnings per share of $0.42 topped forecasts of $0.40.

WHAT SHOULD INVESTORS DO NOW?

Things are looking up for Keurig Dr Pepper and while that is yet to be reflected in the share price, we think that could change as evidence of improved earnings comes through.

We remain buyers and have confidence that the company’s product offering, representing an affordable luxury for consumers, can continue to do well even against an uncertain market backdrop.

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