Shares of Keurig Dr Pepper (KDP) jumped 0.4 % during today's afternoon session, bringing their 52 week performance to -11.0%. The stock seems to be overvalued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account the company's poor growth indicators and positive market sentiment.
Keurig Dr Pepper Inc. operates as a beverage company in the United States and internationally. The large-cap Consumer Staples company is based in Burlington, United States and has 28,000 full time employees.
KDP's P/E Ratio Is Comparable to its Sector Average
Compared to the Consumer Staples sector's average of 24.36, Keurig Dr Pepper has a trailing twelve month price to earnings (P/E) ratio of 28.0 and an expected P/E ratio of 16.5. P/E ratios are calculated by dividing the company's share price by either its trailing 12 month ($1.13) or forward earnings per share ($1.92).
Earnings is another term for the net profits left over after subtracting cost of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Keurig Dr Pepper's P/E ratio is near its sector average of 24.36, we can deduce that the market is fairly valuing the company's earnings.
Keurig Dr Pepper Is Overvalued in Terms of Expected Growth
Keurig Dr Pepper's PEG ratio is 2.55. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Keurig Dr Pepper's case, it tells us the company is overvalued.
KDP Has an Average P/B Ratio
Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.
Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For Keurig Dr Pepper, the P/B value is 1.75 while the average for the Consumer Staples sector is 4.29.
KDP's Weak Cash Flow Generation Is Troubling
The table below shows that Keurig Dr Pepper is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in Keurig Dr Pepper's case, free cash flow is growing at an average rate of 0.0% with a coefficient of variability of 4323920233.6%. We can also see that cash flows from operations are evolving at a 0.0% rate, versus 0.0%:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-23 | 2,837,000 | -211,000 | 3,048,000 | -4.96 |
| 2022-02-24 | 2,874,000 | -333,000 | 3,207,000 | 15.78 |
| 2021-02-25 | 2,456,000 | -314,000 | 2,770,000 | 6.87 |
| 2020-02-27 | 2,474,000 | -118,000 | 2,592,000 | 44.8 |
| 2019-02-28 | 1,613,000 | -177,000 | 1,790,000 | 44.01 |
| 2018-08-07 | 1,038,000 | -205,000 | 1,243,000 |
Keurig Dr Pepper's Margins Are Strong
If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Keurig Dr Pepper's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.
Keurig Dr Pepper's Gross Margins
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-23 | 14,057,000 | -6,734,000 | 52 | -5.45 |
| 2022-02-24 | 12,683,000 | -5,706,000 | 55 | -1.79 |
| 2021-02-25 | 11,618,000 | -5,132,000 | 56 | 0.0 |
| 2020-02-27 | 11,120,000 | -4,778,000 | 56 | 7.69 |
| 2019-02-28 | 7,442,000 | -3,560,000 | 52 | -13.33 |
| 2018-08-07 | 6,690,000 | -2,695,000 | 60 |
Keurig Dr Pepper's Operating Margins
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-23 | 14,057,000 | -4,540,000 | 20 | -13.04 |
| 2022-02-24 | 12,683,000 | -4,083,000 | 23 | 4.55 |
| 2021-02-25 | 11,618,000 | -3,939,000 | 22 | 4.76 |
| 2020-02-27 | 11,120,000 | -3,964,000 | 21 | 23.53 |
| 2019-02-28 | 7,442,000 | -2,645,000 | 17 | -19.05 |
| 2018-08-07 | 6,690,000 | -2,607,000 | 21 |
Keurig Dr Pepper's cost of revenue is growing at a rate of -0.0% in contrast to -11.2% for operating expenses. Sales revenues, on the other hand, have experienced a 0.0% growth rate. As a result, the average gross margins growth is 0.0 and the average operating margins growth rate is -1.0, with coefficients of variability of 5.4% and 10.0% respectively.
Keurig Dr Pepper Benefits From Positive Market Signals
The market sentiment regarding Keurig Dr Pepper is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $45.0 to $30.0. KDP is trading -18.36% away from its target price of $38.69. 1.1% of the company's shares are tied to short positions, and 58.2% of the shares are held by institutional investors.
| Date Reported | Holder | Percentage | Shares | Value |
|---|---|---|---|---|
| 2023-06-30 | Capital World Investors | 6% | 80,618,799 | $2,546,344,692 |
| 2023-06-30 | Vanguard Group Inc | 5% | 76,706,305 | $2,422,768,573 |
| 2023-06-30 | Blackrock Inc. | 5% | 70,845,324 | $2,237,649,493 |
| 2023-06-30 | FMR, LLC | 4% | 53,755,421 | $1,697,864,923 |
| 2023-06-30 | Capital International Investors | 4% | 51,604,096 | $1,629,915,324 |
| 2023-06-30 | Wellington Management Group, LLP | 3% | 41,504,415 | $1,310,916,909 |
| 2023-06-30 | State Street Corporation | 3% | 37,359,724 | $1,180,006,848 |
| 2023-06-30 | Geode Capital Management, LLC | 1% | 16,604,177 | $524,442,915 |
| 2023-06-30 | Boston Partners | 1% | 15,720,251 | $496,524,113 |
| 2023-06-30 | T. Rowe Price Investment Management, Inc. | 1% | 15,588,901 | $492,375,423 |
