Keurig Dr Pepper Inc (NAS: KDP)
Last Price: USD: 38.62| Fair Value: USD: 34.00
Business Strategy & Outlook
The merger of Keurig Green Mountain and Dr Pepper Snapple into Keurig Dr Pepper created a North American beverage behemoth with strong brands and supply chain positioning. Despite being only one third and one sixth the size of Coke and Pepsi, respectively, Keurig Dr Pepper appears poised to augment the positioning of its cold business (60% of sales). However, it will have a more difficult time navigating various structural headwinds plaguing its hot business. Across soft drinks, the firm should be able to maintain a top-three position in its core categories. Although it’s disproportionately exposed to the beleaguered soda category, innovation will continue to resonate, owing to a core consumer gleaning a higher marginal benefit from consumption, affording continued pricing tailwinds. Moreover, the breadth of Keurig Dr Pepper’s selling apparatus facilitates exposure to high-growth segments, as smaller brands (like Polar Seltzer) leverage the firm for manufacturing or distribution.
Merger synergies have fuelled Keurig Dr Pepper’s strategic initiatives, with $600 million in cost savings (around 5% of sales) to be realized by 2022 via consolidated distribution, procurement leverage, and administrative streamlining. Management noted at the 2021 investor day that these savings would be used to fund initiatives surrounding customer acquisition and company-owned delivery. Competition remains robust across Keurig Dr Pepper’s core categories, and growth prospects outside of North American markets are encumbered by the firm’s lack of ownership rights to key trademarks internationally. Still, its resonant brands, distribution prowess, and partner networks will allow the company to maintain its positioning.
Financial Strengths
KDP’s financial position is manageable, though far from stellar. Keurig was considered the acquirer from an accounting perspective for the merger and funded the purchase of DPS’ assets with roughly 60% debt. The net debt/adjusted EBITDA for the combined entity rose above 8 times in 2018 after the merger, precariously higher than peers. Still, the stability of its industries, in conjunction with its profitability and management team, has allowed the company to manage its debt load, which will continue. KDP’s net debt/adjusted EBITDA ratio fell to 2.9 times as of December 2021, completing management’s goal of sub-3 times by 2021. Leadership aims to remain above the investment-grade threshold, and the material reduction in Keurig’s debt levels subsequent to being taken private lends credence to its ability in this regard. Though business prospects remain bright despite COVID-19, management used the opportunity to restructure its debt profile through extended maturities and lower rates, which gives us even greater confidence that the firm will be able to maintain its investment-grade credit rating (Moody’s also upgraded the debt outlook from negative to stable in
February 2021). Liquidity should also not be an issue, as in addition to over $550 million in cash (as of June 2022), the firm has ample access to short-term liquidity by way of commercial paper and its structured payables program.
Bulls Say
Company Description
Keurig Dr Pepper, the product of a 2018 merger between Dr Pepper Snapple and Keurig Green Mountain, is the third-largest non-alcoholic beverage company in North America. In addition to the eponyms, the firm’s flagship brands include 7UP, Canada Dry, Schweppes, Mott’s, and Bai. The company situates itself at different positions of the value chain depending on the segment (it reports four operating segments) and the product. It is primarily a brand owner in its beverage concentrates and Latin America beverages segments, as well as for the single-serve brewers within its coffee systems segment, and owns integrated production and distribution operations in its packaged beverages segment as well as for its K-cup pods.
(Source: Morningstar)
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