Is It Time To Buy Keurig Dr Pepper Or Cut Losses?

Key Points

• Keurig Dr Pepper had a beat-and-raise quarter lifting shares off of a long-term low. 
• Guidance was raised and may lead to a sustained rally, but there are hurdles. 
• The analysts' activity may weigh the price action and keep the stock from regaining critical support levels. 

After correcting to long-term lows earlier this year, Keurig Dr Pepper NASDAQ: KDP had a beat-a-raise quarter reinvigorating the bull case. The news has shares up nearly 5% and trading at a critical level that could open the door to a sustained rally. The question is if current holders will remain on board or use the surge as a chance to cut their losses.

The stock is down 17% from its recent highs and was down as much as 20% and more at the movement's low. That’s a good reason to get out of a market, and this 1 is at a critical level. So, Keurig Dr Pepper had a great quarter, and it may move higher, but not before it crosses a significant point of resistance.

If it can do it, KDP shares could trend higher. If the market can’t get above $34 and hold it, this market will definitely move lower. 

Diversified Keurig Dr Pepper Beats And Raises 

Diversified Keurig Dr Pepper posted solid growth in Q2 and outpaced the consensus estimate, an example of when diversification doesn’t pay off. The company’s 6.6% growth beat the consensus estimate by a slim margin but lags behind the double-digit gains posted by beverage giants PepsiCo NASDAQ: PEP and The Coca-Cola Company NYSE: KO.

Growth was driven by an 11.8% increase in US refreshment beverages and offset by a 5.7% decline in coffee. Coffee sales are impacted by consumer shifts that include returning to work ie, less coffee at home.

Sales growth is due entirely to higher prices, with average pricing up 8.1% and volume down 2.1%, consistent with the industry. 

The margin news is marginally good. The adjusted margin contracted slightly compared to last year but not enough to offset the top-line strength. The increase in costs includes increased marketing costs which should result in better sales down the road.

Until then, the adjusted operating income rose 4.4% compared to last year and is 23% of revenue. GAAP earnings came in at $0.36, adjusted at $0.42, both $0.02 better than expected, and adjusted EPS is up 7.6% YOY. 

The guidance is the best news in the report. The company cautiously raised its guidance for revenue by 100 basis points to 5% to 6% while reaffirming the EPS outlook. EPS is expected to grow 6% to 7% and may top this estimate, given the top-line strength.

Trends within the beverage industry support KDP, KO, and PEP growth and should remain solid through the end of the year. 

Keurig Dr Pepper Offers Value, But Analysts Aren’t Buying It 

Keurig Dr Pepper offers value relative to PEP and KO stock trading at 18X its earnings. Those stocks trade closer to 25X and 26X while paying similar dividends. KDP yields about 2.45% compared to PEPs at 2.65% and KOs at 2.9%.

The biggest difference is that PEP and KO pay out more of their earnings and have a substantial history of distribution increases. Both are Dividend Kings with 50+ years of increases, while KDP has an erratic history of increases albeit a history of increases.  

The price action in KDP stock is favorable. The market is up nearly 5% and showing a strong candle. The move has the price action above the long-term moving average but still faces resistance.

Resistance at $34 could be strong and hold the market from moving any higher. The analysts may not be any help; they rate the stock at Hold with a price target that has been slipping all year. The consensus is above critical resistance but may not remain that way long.