Is Keurig Dr Pepper Stock A Better Beverage Pick Over Coca-Cola?

We believe that Keurig Dr Pepper stock (NASDAQ:KDP) is a better pick than its industry peer – Coca-Cola stock (NYSE: KO). KO stock trades at a higher multiple of 6x sales, versus 3x revenues for KDP. This can be attributed to Coca-Cola’s superior revenue growth, profitability and financial position. There is more to the comparison, and in the sections below, we discuss why we think KDP will outperform KO in the next three years. In this analysis, we compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. KO Stock Has Fared Better In The Last Three Years

KDP stock has witnessed gains of 15% from levels of $30 in early January 2021 to around $35 now, vs. an increase of about 20% for KO from $55 to $65 over the same period. In comparison, the broader S&P500 saw 45% gains over this roughly three-year period. However, the increase in these stocks has been far from consistent. Returns for KDP stock were 15% in 2021, -3% in 2022, and -7% in 2023, while KO stock saw returns of 8%, 7%, and -7% over these years, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that KDP and KO 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 and KO face a similar situation as they did in 2021 and 2023 and underperform the S&P over the next 12 months — or will they see a strong jump? While we expect both stocks to trend higher, KDP will likely fare better than KO.

2. Coca-Cola Has Seen Better Revenue Growth

Keurig Dr Pepper saw its sales rise at an average annual rate of 8.5% from $11.6 billion in 2020 to $14.8 billion in 2023, while Coca-Cola’s sales grew at an average rate of 11.6% from $33 billion to $45.8 billion over the same period.

Keurig Dr Pepper’s revenue growth benefited from at-home demand for K-Cups due to a sudden surge in at-home consumption during the pandemic phase. While the company has benefited from pricing gains in recent years, its U.S. coffee segment sales have been trending lower lately, amid a weakening consumer spending environment and a shift to lower price point alternatives. The company has the edge over other beverage companies as its coffee segment remains an important long-term growth driver, with people moving away from carbonated drinks and replacing them with other beverages. For now, Keurig Dr Pepper’s refreshment beverages business is doing better.

Coca-Cola’s revenue growth has been driven by both at-home and away-from-home channels. This can be attributed to solid pricing trends. The North America and Latin America markets have been leading the growth. Of late, the company is seeing more traction in the away-from-home business than at-home beverages. This can be attributed to higher inflation and a shift in consumer spending behavior.

3. Coca-Cola Is More Profitable

Keurig Dr Pepper’s operating margin of 21.6% in 2023 declined marginally from 21.9% in 2020, while Coca-Cola’s operating margin contracted from 29.5% to 28.6% over this period. Looking at the last twelve-month period, Coca-Cola’s operating margin of 28.9% fares better than 22.6% for Keurig Dr Pepper.

Looking at financial risk, Coca-Cola fares better than Keurig Dr Pepper, with its 16% debt as a percentage of equity being lower than 37% for the latter. Moreover, its 17% cash as a percentage of assets is higher than <1% for Keurig Dr Pepper, implying that Coca-Cola has a better debt position and more cash cushion.

4. The Net of It All

We see that Coca-Cola has demonstrated better revenue growth, is more profitable, and has a better financial position. Still, looking at prospects, we believe KDP is the better choice of the two, given its attractive valuation. We estimate Keurig Dr Pepper’s Valuation to be $38 per share, reflecting over 15% upside from its current levels of $33. 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 four years. On the other hand, we estimate Coca-Cola’s Valuation to be $65 per share, reflecting only a 3% upside. Our forecast is based on a 23x P/E multiple for KO and expected earnings of $2.85 on a per-share and adjusted basis for the full year 2024. The 23x P/E multiple aligns with the average value over the last four years.

Overall, the U.S. coffee sales remains a near-term headwind for Keurig Dr Pepper, while Coca-Cola may continue to see a tepid volume growth amid higher inflation impacting consumer spending. Still, if one has to pick any one of these two beverage stocks, we believe Keurig Dr Pepper will fare better, with its better valuation.

While KDP may outperform KO in the next three years, it is helpful to see how Keurig Dr Pepper’s fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 7/4/2024
[2] Cumulative total returns since the end of 2016

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