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Sodas may not be the trendiest drinks right now, but they’re a long-term winner for
That’s according to Wells Fargo analyst Chris Carey, who upgraded Keurig Dr Pepper (ticker: KDP) to Overweight from Equal Weight on Tuesday, while raising his price target to $42 from $36. The report helped boost the shares 1.1% to $35.25 in Tuesday morning trading.
Keurig Dr Pepper’s shares have been a relative outperformer this year—rising 9% year to date, while both
(KO) and
(PEP) are off about 1% in the same time frame. Carey writes that this rally has been “under-appreciated and misunderstood,” and that both company-specific and macro tailwinds will help it continue.
Carbonated beverages have been a boon for the company recently, which he chalks up to its low-calorie offerings and consumer’s general preference for its flavors. The introduction of Dr Pepper Zero in March substantially boosted Keurig Dr Pepper’s position in the low-calorie soda market, which should help it sustain that recent success. He’s also upbeat about its focus on the North American market, where pricing has been more rational, and there appears to be room for price increases to help offset rising input costs.
Of course the company does face some difficult comparisons ahead, especially given how many people bought its Keurig home-brewing coffee systems during the pandemic. Yet Carey notes that these carry low-to-no margins, meaning that a year-over-year decline in their sales won’t have as much effect on the bottom line.
Moreover he notes that Keurig Dr Pepper, at less than 22 times forward earnings, “trades at a discount to our entire coverage,” including Pepsi and Coke, with the exception of some smaller names and companies with debatable growth. “Does that make sense? Given the execution story and favorable macro (pricing) overlay, we don’t think this is appropriate.”
Now looks like an especially opportune time to buy in, Carey writes, given that Keurig Dr Pepper stock fell 5% earlier this month after
(MDLZ) announced it was reducing its stake in the company, creating an attractive entry point.
Write to Teresa Rivas at teresa.rivas@barrons.com
