Will Keurig Dr Pepper (KDP) Stock Recover To Its Pre-Inflation Shock High of $40?

Keurig Dr Pepper stock (NASDAQ: KDP) currently trades at $31 per share, 23% below the peak level of $40 seen in August 2022, and it seems to have ample room for growth, in our view. KDP stock was trading at around $35 in early June 2022, just before the Fed started increasing rates, and is now 13% below that level, compared to 34% gains for the S&P 500 during this period. This underperformance can primarily be attributed to a decline in overall volume/mix, amid a weak consumer spending environment. The company’s coffee segment in particular has been seeing lower sales lately.

Looking at a slightly longer term, KDP stock has seen little change, moving slightly from levels of $30 in early January 2021 to around $30 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. Overall, the performance of KDP stock with respect to the index has been lackluster. Returns for the stock were 15% in 2021, -3% in 2022, and -7% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that KDP underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could KDP face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, KDP stock looks like it can see higher levels. We estimate Keurig Dr Pepper’s Valuation to be $38 per share, reflecting over 20% upside from its current levels of $31. Our forecast is based on a 20x P/E multiple for KDP and expected earnings of $1.93 on a per-share and adjusted basis for the full year 2024. The 20x P/E ratio aligns with the stock’s average over the last five years.

Our detailed analysis of Keurig Dr Pepper’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession but points to potential rate cuts in 2024

In contrast, here’s how Keurig Dr Pepper stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

KDP and S&P 500 Performance During 2007-08 Crisis

KDP stock declined from $26 in September 2008 (pre-crisis peak for the stock) to $14 in March 2009 (as the markets bottomed out). It recovered after the 2008 crisis to levels of around $28 in early 2010, rising 2x between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 (pre-crisis peak for the index) to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Keurig Dr Pepper’s Fundamentals Over Recent Years

Keurig Dr Pepper’s revenue increased to $14.8 billion in 2023, compared to $12.7 billion in 2021, led by strong pricing gains for its products. The company’s operating margin decreased from 22.8% in 2021 to 21.6% in 2023. However, the company saw its margins expand year-over-year in 2023. In fact, the overall net income increased by 52% in 2023. Our dashboard on What Drove the 51.9% Net Income Change for Keurig Dr Pepper in FY2023? has more details. Keurig Dr Pepper’s reported earnings per share increased slightly to $1.57 in 2023 from $1.51 in 2021.

Does Keurig Dr Pepper Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Keurig Dr Pepper’s total debt increased from $13.3 billion in 2021 to $14.8 billion in 2023, while its cash decreased from $567 million to $267 million over the same period. The company also garnered $1.3 billion in cash flows from operations in the last twelve months. Given its cash cushion, Keurig Dr Pepper appears to be in a reasonable position to service its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment and rate cuts are likely in the cards, we believe Keurig Dr Pepper stock has the potential for solid gains once fears of a recession are allayed. Although, there are near-term concerns for KDP stock, such as the overall consumer spending environment is weak due to higher inflation, but it appears to be priced in for the stock. Furthermore, with inflation easing, the demand environment is expected to improve. Overall, we think investors will likely be better off picking KDP stock at current levels for robust gains in the long run.

While KDP stock can see higher levels, it is helpful to see how Keurig Dr Pepper’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 4/5/2024
[2] Cumulative total returns since the end of 2016

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