Most analysts love Keurig Dr Pepper, which has an average rating of buy. But there's reason to believe the stock may be overvalued at today's price of $34.01 per share. Let's look at the fundamentals ourselves and see if we reach a different conclusion than the analyst community.
Keurig Dr Pepper has a P/E ratio of 36.6 based on its 12 month trailing earnings per share of $0.93. Considering its future earnings estimates of $1.92 per share, the stock's forward P/E ratio is 17.7. In comparison, the average P/E ratio of the Consumer Staples sector is 24.36 and the average P/E ratio of the S&P 500 is 15.97.
Keurig Dr Pepper's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn'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 2.75 Price to Earnings Growth (PEG) ratio. Since the PEG ratio is greater than 1, the company's lofty valuation is not justified by its growth levels.
We can also compare the ratio of Keurig Dr Pepper's market price to its book value, which gives us the price to book, or P/B ratio. A company's book value refers to its present equity value -- or what is left over when we subtract its liabilities from its assets. KDP has a P/B ratio of 1.91, with any figure close to or below one indicating a potentially undervalued company.
Next up in our analysis is Keurig Dr Pepper's levered free cash flow, which stands at $3.05 Billion. This represents the cash that is available to the company after all of its expenses and income are accounted for -- including those that arise outside of its core business activities. This money can be used to re-invest in the business or to payout a dividend. For now, at least, Keurig Dr Pepper has chosen the former.
With most indicators pointing at a higher than average valuation with uncertain growth prospects, most analysts are either wrong about Keurig Dr Pepper, or their research has uncovered one or more qualitative reasons to invest in the stock. For example, the strength of the management team and their plan for executing the business strategy may have convinced some analysts to give less weight to traditional quantitative factors.