Will Margin Growth Aid Keurig Dr Pepper’s Q2?

Keurig Dr Pepper stock (NASDAQ: KDP) will report its Q2 2024 results on Thursday, July 25. We expect it to report revenues of $3.9 billion and earnings of $0.45 per share, aligning with the consensus estimates. Better price realization will likely drive sales growth for the company. Furthermore, our forecast indicates that KDP stock has some room for growth, as discussed below. Our interactive dashboard analysis of Keurig Dr Pepper Earnings Preview has additional details.

Firstly, let us look at KDP stock performance in recent years. It has witnessed gains of 15% from levels of $30 in early January 2021 to around $35 now, vs. an increase of about 50% for the S&P 500 over this period. However, the increase in KDP stock has been far from consistent. 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 has some room for growth. We estimate Keurig Dr Pepper’s Valuation to be $38 per share, reflecting around 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 figure aligns with the stock’s average P/E ratio over the last five years.

Looking at the previous quarter, Keurig Dr Pepper’s revenue of $3.5 billion in Q1 reflected a 3.4% y-o-y rise. This was driven by a 4.3% growth in the U.S. Refreshment Beverages and an 11.8% rise in the International segment, partly offset by a 2.1% decline for the U.S. Coffee segment. The sales growth was led by 3.1% pricing gains, partially offset by a 0.3% fall in volume. The company reported earnings of $0.38 on a per-share and adjusted basis, compared to $0.34 in the prior-year quarter.

Coming to the latest quarter, Keurig Dr Pepper will likely see around 3% y-o-y top-line growth. It should continue to benefit from better price realization and international expansion. However, the U.S. Coffee segment sales may trend lower. The company has been able to expand its margins lately, and it is working on reviving the coffee sales in the U.S. This should bode well for its stock going forward.

Overall, we think Keurig Dr Pepper will post an in-line Q2 and the stock movement will largely depend on how its margin profile trends. A better than anticipated operating margin will likely result in higher levels for KDP stock.

While KDP stock has some room for growth, 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 7/24/2024
[2] Cumulative total returns since the end of 2016

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