Famed beverage company Keurig Dr Pepper company saw its shares slump -2.9% to a price of $36.19, which is 12.87% below their average analyst target price of $41.53. KDP underperformed the S&P 500 index by -2.7% during today's afternoon session, but outpaced it by 25.5% over the last year with a return of 9.5%. The average analyst rating for the stock is buy.
Keurig Dr Pepper Inc. operates as a beverage company in the United States and internationally. The company is considered a consumer defensive, or non cyclical consumer company. This sector includes the packaged foods, grocery store, tobacco, and personal product businesses. The idea behind their so-called defensiveness is that their sales -- and by extension, their stock prices -- tend to remain stable during periods of economic recession.
This is because consumers tend to buy staples even when they see their discretionary income reduced. They will cut spending in other areas before they cut their spending on staples. The share prices of these companies tend to remain stable during periods of economic growth too, so their reduced volatility involves a possible trade off with respect to performance potential.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the consumer defensive sector has an average P/E ratio of 24.21, and the average for the S&P 500 is 15.97.
Keurig dr pepper's trailing 12 month P/E ratio is 23.8, based on its trailing Eps of $1.52. The company has a forward P/E ratio of 19.5 according to its forward Eps of $1.85 -- which is an estimate of what its earnings will look like in the next quarter.
The problem with P/E ratios is that they don't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations. We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 3.11 Price to Earnings Growth (PEG) ratio. Since the PEG ratio is greater than 1, the company's valuation is not completely justified by its growth levels.
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Keurig Dr Pepper's gross profit margin trends:
- 2021 gross margins: 55.2 %
- 2020 gross margins: 56.2 %
- 2019 gross margins: 57.0 %
- 2018 gross margins: 54.0 %
- Average gross margin: 55.6 %
- Average gross margin growth rate: 0.8 %
- Coefficient of variability (a lower number indicates more stability): 2.4 %
We can see from the above that Keurig Dr Pepper's gross margins are very strong. Potential investors in the stock will want to determine what factors, if any, could derail this attractive growth story.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Keurig Dr Pepper's free cash flow, which was $2,451,000,000 as of its most recent annual report.
Over the last 4 years, the company's average free cash flow has been $$2,005,750,000 and they've been growing at an average rate of 21.8%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in KDP have received an annualized dividend yield of 2.0% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Keurig Dr Pepper's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 2.0, but is still below the average P/B ratio of the Consumer Defensive sector, which stood at 4.09 as of the second quarter of 2022.
Since it has lower P/E and P/B ratios than the sector average and a steady upwards trend of positive cash flows, Keurig Dr Pepper is likely undervalued at today's prices. The company has mixed growth indicators because of its strong gross margins, that display an upwards trend, but it also has an inflated PEG ratio. We hope you enjoyed this overview of KDP's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
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