Is KDP Stock A Better Consumer Defensive Pick Over KMB?

Given its better prospects, we believe that Keurig Dr Pepper stock (NYSE: KDP) is currently a better consumer defensive pick than Kimberly-Clark stock  (NYSE: KMB). KDP stock trades at a slightly higher valuation multiple of 2.9x revenues, versus 2.3x for KMB. This can be attributed to Keurig Dr Pepper’s superior revenue growth and profitability. We think this gap in valuation multiple will remain in favor of KDP over the next few years. There is more to the comparison, and in the sections below, we discuss why we think KDP will outperform KMB in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation in an interactive dashboard analysis – Kimberly-Clark vs. Keurig Dr Pepper.

1. KDP & KMB Have Underperformed The Broader Markets

KMB stock has witnessed gains of 15% from levels of $120 in early January 2021 to around $140 now, aligning with the gains for KDP stock from $30 to $35 over this period. This compares with an increase of about 60% for the S&P 500 over this roughly four-year period.

However, the changes in these stocks have been far from consistent. Returns for KMB stock were 10% in 2021, -2% in 2022, and -7% in 2023, while that for KDP returns were 17%, -1%, and -4%, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that both KMB and 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 UL, CL, and PG, 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.

2. KDP’s Revenue Growth Is Better

Keurig Dr Pepper saw it sales rise at an average annual rate of 8.5% from $11.6 billion in 2020 to $14.8 billion in 2023. On the other hand, Kimberly-Clark’s revenue growth has been slower, with a 2.2% average annual growth rate from $19.2 billion to $20.4 billion over this period.

Kimberly-Clark’s revenue growth has lately been driven by better price realization. The company produces primarily paper-based consumer products, manufacturing sanitary paper products and surgical & medical instruments. The Personal Care segment made up around 52% of the company’s sales in 2023, contributing $10.7 billion to total revenue. Although the company is benefiting from pricing gains for its products, the volume growth has been tepid lately.

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. That said, it is Keurig Dr Pepper’s refreshment beverages business that has been doing better lately.

3. KDP Is More Profitable

Keurig Dr Pepper’s reported operating margin of 21.6% in 2023 was slightly below the 21.9% figure seen in 2020. In comparison, Kimberly-Clark’s operating margin contracted from 16.9% to 14.7% over this period. Looking at the last twelve-month period, KDP’s operating margin of 22.9% fares better than 17.1% for the latter.

4. Kimberly-Clark Offers Lower Financial Risk

Looking at financial risk, Kimberly-Clark fares better. While Keurig Dr Pepper’s 37% debt as a percentage of equity is higher than 16% for Kimberly-Clark, its 1% cash as a percentage of assets is also lower than 7% for the latter. This implies that Kimberly-Clark has a better debt position and more cash cushion.

5. The Net of It All

[1] Returns as of 11/28/2024
[2] Cumulative total returns since the end of 2016

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