Analysts from Goldman Sachs Equity Research were overwhelmingly positive about Keurig Dr Pepper’s (KDP) long term growth potential following the company’s Investor Day webcast last week.
In an analysis of the webcast, Goldman Sachs said the company’s “upbeat outlook delivered on our expectations” to accelerate topline growth and increase earnings. The company said it predicts one to two points of annual upside to its earnings growth target and is also “stepping up shareholder returns” by authorizing a $4 billion repurchase of stock through fiscal year 2025, the report stated.
For its part, during the briefing KDP also said it aims to increase M&A activity in the coming years, with up to $20 billion in potential capacity to acquire brands to fill white space in its portfolio.
As well, the company is benefiting from recent innovations including its Keurig brewer appliances, according to Goldman Sachs, and recently launched Zero Sugar SKUs for the Dr Pepper brand. According to the company, Zero Sugar helped expand its retail market share for RTD beverages in Q2, while an estimated 70% of the demand for Zero Sugar drinks has been incremental.
Though KDP did not announce categories it aims to expand in, Goldman Sachs suggested the company has potential to grow its reach in the energy and RTD coffee spaces, which despite having entries in both categories (A Shoc in energy, Peet’s in coffee) it has frequently struggled to compete with category leaders.
According to the Goldman report, KDP also plans to generate $4 billion in discretionary cash flow between fiscal year 2022 and 2024 that will be driven by EPS growth, free cash flow conversion and a balanced dividend payout ratio. Goldman Sachs noted that the company has a “strong balanced portfolio” and benefits from its environmental, social and governance (ESG) mission and a “high performing team.”
“We view all of these targets very favorably — and while the majority were largely in-line
with our expectations, they are likely a bit higher vs. the broader market’s expectations — a key positive,” the report stated. “Importantly, these targets are largely in-line with KDP’s larger bev peers [Coke and Pepsi] and, as such, we increasingly believe that KDP’s [estimated] 2-3x val discount is unjustified (i.e. there’s no longer an excuse for this discount, in our view).”
However, Goldman Sachs said it remained concerned about mounting cost pressures due to inflation driving higher prices for raw materials, transportation and labor, but added that the issue is “largely transitory.”
Other firms, including Barclays and UBS, were optimistic about KDP’s upside potential after the webcast. But not all analysts were as bullish — Credit Suisse maintained a neutral rating on KDP after the webcast, noting that the company brings higher long term targets, but investors should expect lower near-term profits.
KDP leadership also discussed plans to improve its DSD network, with plans to invest in retail-level execution standards and front-line sale straining; embed data and analytics, including artificial intelligence-driven predictive ordering software and upgrading routing software; and improve its sales team with increased specialization in DSD sales and operations. According to the report, leadership said KDP is willing to buy back distribution rights from independent distributors in regions that overlap with its DSD footprint, and has already begun working to consolidate its network over the past two years through partnerships with Honickman Companies in New York and New Jersey and The Red River Beverage Group in Texas and Louisiana.
Net sales for KDP grew 4.5% in 2020 to $11.6 billion and gross profit was up 3.1% to $6.5 billion. In July, KDP announced net sales in Q2 had risen 9.6% to $3.14 billion for the quarter and were up 10.3% to $6.04 billion for the first half of 2021. The company is expected to release its Q3 earnings report on October 28.