Here's Why You Should Hold On To Keurig Dr Pepper Stock Now

Keurig Dr Pepper (NYSE:KDP) has been in investors’ good books, owing to its strong performance in third-quarter 2018 and smooth progress on the integration of the merged companies — Dr Pepper Snapple Group (“DPS”) and Keurig Green Mountain (“KGM”). Additionally, the company’s promising outlook for 2018, and its strategy of making partnerships and acquisitions indicate that the stock should retain the ongoing momentum in the coming days.

This Zacks Rank #3 (Hold) company increased 7.1% in the last three months, outperforming the industry ’s decline of 6.4%. However, lower realized prices due to pricing actions initiated in the third quarter and unfavorable currency remain headwinds. The company is also not immune to the CSD category headwinds.

Here are some factors indicating that Keurig Dr Pepper has the potential for growth despite these headwinds.

Robust Q3 Performance

Keurig Dr Pepper’s top and bottom lines improved year over year while earnings beat estimates in the third quarter of 2018. The top line gained from robust volume/mix and significant market share gains across major categories while operating income growth and lower taxes benefited the bottom line. Notably, the company reported significant market share gains for the CSD portfolio, including Dr Pepper and Canada Dry as well as the coffee portfolio.

Further, the company expanded its coffee portfolio on the back of unit growth for single-serve pod category as well as improved market share for pods produced by Keurig Dr Pepper.

Outlook Looks Promising

For 2018, Keurig Dr Pepper continues to anticipate adjusted earnings per share of $1.02-$1.07. Net sales for the year are expected to increase 1-2%, with operating income growth of 7-8%.

For the long term, it expects to generate deal synergies of nearly $600 million between 2019 and 2021, with about $200 million savings anticipated every year. It also expects to deliver average annualized adjusted pro forma EPS growth rate of 15-17% between 2018 and 2021. Additionally, the company expects significant cash flow generation and rapid deleveraging, targeting leverage ratio of less than 3.0 in two to three years.

Partnerships & Acquisition Strategy

Focus on partnerships and acquisitions remains Keurig Dr Pepper’s key growth strategy. Since the completion of the merger, the company acquired Big Red and agreed to acquire CORE Hydration, adding these two partner brands to its owned portfolio. It also added Forto Coffee Energy Shots as a new partner and expanded distribution terms with Peet's for ready-to-drink Iced Expresso. It will distribute Forto throughout its network and Peet's, primarily through its network of convenience stores.

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Additionally, the company recently signed a long-term agreement to sell, distribute and merchandise the Evian brand across the United States. It also added the iconic Canadian coffee brand, Tim Horton’s, and the U.S.-based bakery-cafe brand Panera as Keurig partners. Furthermore, Keurig Dr Pepper exited FIJI Water and BODYARMOR drink brands as part of the recent reorganization of its allied brands. Consequently, the company currently has over 75 owned, licensed and partnered brands in the Keurig system.

Factors to Deter Growth

Though Keurig Dr Pepper’s strong quarter and strategy look good, lower realized prices and unfavorable currency offset gains from improved volume/mix for the Coffee Systems segment. Pricing actions initiated in the third quarter could not fully offset higher input costs and logistics. Notably, pricing continued to be moderate significantly on a sequential basis mainly due to strategic pod pricing investment.

Further, the company is not immune to the industry headwinds related to the CSD category and higher input costs, particularly for aluminum cans. Moreover, rising raw material costs, specifically aluminum, has been hurting its performance.

Bottom Line

While the near-term headwinds may persist, Keurig Dr Pepper is well positioned for growth backed by the aforementioned strategy. Further, the company’s impressive long-term earnings growth rate of 17.1% supports our view.

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