Keurig-Dr Pepper stock: Time to take another sip?

Key Points

• Keurig Dr Pepper had a mixed quarter, sending share prices seeking market support: support was found, but will it hold?
• Weaker-than-expected guidance is in the mix: Guidance forecasts top and bottom-line growth. 
• Capital returns, including dividends and share-count-reducing share repurchases, help support the market: analysts' price targets imply a deep value play. 

Keurig Dr Pepper's NASDAQ: KDP share price fell following the Q4 results and guidance for 2024, setting up the next buying opportunity. The market is down but aligning with a bottoming pattern while the business reaches an inflection point. Coffee remains a weak spot, and the guidance isn’t robust, but it points to continued growth and broader margins, which matters most to investors. Growth and broader margins align with the outlook for capital returns and equity gains and will ultimately support the market. 

There is a chance for KDP shares to move lower between then and now, but a floor is in sight. The stock hit bottom and rebounded significantly ahead of the Q3 release, setting a floor for the market bolstered by analysts’ sentiment. The analysts may trim their targets now that guidance is in place, but downward revisions are unlikely to alter the value proposition Keurig Dr Pepper offers. Trading at current levels near $30.30, it is about 1000 basis points below the analyst's lowest price target and 22% below the consensus.

Keurig Dr Pepper has a mixed quarter; issues cautious guidance

Keurig Dr. Pepper had a mixed quarter relative to the consensus estimates. The company’s $3.87 billion is up 1.8% compared to last year but missed the consensus while margins impressed. The topline miss is slim, about 100 basis points, and easy to overlook due to the stock’s value, yield and equity gains. 

Segmentally, Coffee remains the weak link, down 5.4% for the year and 9% in Q4. It is impacted by industry normalization post-pandemic; we aren’t drinking as much coffee at home as we did two years ago, but normalized business is coming soon. The company expanded its segment reach during the quarter, growing the number of households using its product and improving its margin. US Refreshment Beverages and International grew by 9.1% and 15%, respectively, to align with PepsiCo's NASDAQ: PEP and The Coca-Cola Company's NYSE: KO results. 

The margin news is good. The company widened its gross and operating margin to deliver outperformance on the bottom line. Margin improvement is centered on cost control and higher realized prices, which increased by 4.8% YOY. The GAAP earnings grew by 53%, aided by one-offs in the comparisons, while adjusted earnings grew by 10% to beat consensus by a penny. 

Keurig Dr Pepper's cash flow drives value for shareholders

Keurig Dr Pepper generated sufficient cash flow in FY2023 to pay dividends and repurchase shares while improving the balance sheet. The dividend is worth 2.75%, with shares near $30.50 and reasonably safe at 60% of earnings, aligning with peers PEP and KO. The difference is a slightly higher yield with PEP and KO for higher payout and P/E ratios. All are growing their distributions, but KDP is growing its payment quickly and is valued at discount levels. 

Repurchase activity reduced the share count by 1.8% and is expected to continue in 2024. The balance sheet carries debt, but leverage is low, below 0.5% equity and equity is rising, up 2.2% for the year. 

The technical outlook: Keurig Dr Pepper falls to support; it could spring higher

The KDP market is a coiled spring ready to unwind. The market is volatile but putting in a bottom and may already be at support. The daily chart shows some support at the $30 level, consistent with a skewed Head & Shoulders pattern. This pattern may produce a significant rebound soon and could take the market back to $32 or higher over the next few weeks to months. If not, the next target for solid support is near $28 and may be reached quickly. In this scenario, the market will likely fall through support near $28, but that is not expected.