After reaching long-term lows earlier this year, Keurig Dr Pepper (NASDAQ: KDP) had a strong quarter that has revitalized the bull case for the stock. As a result, shares are up nearly 5% and trading at a crucial level that could potentially lead to a sustained rally. The question now is whether current holders will stick with the stock or use this surge as an opportunity to cut their losses.
Key Points
- Keurig Dr Pepper impressed with a beat-and-raise quarter that lifted the stock from long-term lows.
- The company’s raised guidance may result in a sustained rally, although there are hurdles to consider.
- The actions of analysts could impact the price action and prevent the stock from regaining critical support levels.
- There are five other stocks that we like better than Keurig Dr Pepper.
The stock is currently down 17% from its recent highs and was even down more than 20% at its lowest point. This highlights the importance of a critical level for the price movement. So while Keurig Dr Pepper had a strong quarter and may move higher, it must first overcome a significant level of resistance.
If the stock can accomplish this, shares of Keurig Dr Pepper could trend higher. However, if the market fails to move above $34 and hold that level, then this stock will likely move lower.
Diversified Keurig Dr Pepper Beats And Raises
Diversified Keurig Dr Pepper posted solid growth in Q2 and exceeded the consensus estimate, showing that diversification can indeed pay off. The company’s growth of 6.6% slightly surpassed expectations, but it still lags behind the double-digit gains of beverage giants PepsiCo (NASDAQ: PEP) and The Coca-Cola Company (NYSE: KO).
The growth was driven by an 11.8% increase in US refreshment beverages, offset by a 5.7% decline in coffee. The decline in coffee sales can be attributed to shifts in consumer behavior, such as a return to work leading to less coffee consumption at home.
The sales growth is primarily due to higher prices, with average pricing up 8.1% while volume is down 2.1%, which is in line with industry trends.
The margin news is relatively positive. The adjusted margin contracted slightly compared to last year, but not enough to offset the strength in the top-line. The increase in costs includes higher marketing expenses, which should result in better sales in the future.
Overall, the adjusted operating income rose 4.4% compared to last year and accounts for 23% of revenue. GAAP earnings came in at $0.36, while adjusted earnings per share (EPS) stood at $0.42, both exceeding expectations by $0.02. Adjusted EPS is up 7.6% year-over-year.
The best news in the report is the raised guidance. The company cautiously increased its revenue guidance by 100 basis points to a range of 5% to 6%, while reaffirming its EPS outlook. EPS is expected to grow between 6% and 7%, and there is a possibility of surpassing this estimate given the strength in the top-line.
The trends within the beverage industry are favorable for Keurig Dr Pepper, as well as for KO and PEP, and are expected to remain solid for the remainder of the year.
Keurig Dr Pepper Offers Value, But Analysts Aren’t Convinced
Keurig Dr Pepper offers value compared to PEP and KO, trading at 18 times its earnings. In comparison, PEP and KO trade at closer to 25 times and 26 times, respectively, while also offering similar dividends. Keurig Dr Pepper has a dividend yield of about 2.45%, while PEP has a yield of 2.65% and KO has a yield of 2.9%.
The biggest difference is that PEP and KO pay out a higher portion of their earnings and have a strong track record of increasing their dividends. Both companies are Dividend Kings with over 50 years of consecutive dividend increases, whereas Keurig Dr Pepper has an inconsistent history of dividend increases.
Before considering an investment in Keurig Dr Pepper, it’s important to note that while the stock currently has a “Hold” rating among analysts, top-rated analysts believe that there are five other stocks that are better buys.
