Full disclosure: I drink Diet Dr. Pepper religiously and believe it is the best low-calorie soft drink on the planet. No, you can not change my mind.
Investment thesis: This is a good company. But the stock recently crested and is now heading lower. Wait for a clear bottom to form and then acquire it.
Keurig Doctor Pepper (NASDAQ: KDP) is a non-alcoholic beverage maker:
Keurig Dr Pepper Inc. operates as a beverage company in the United States and internationally. It operates through Coffee Systems, Packaged Beverages, Beverage Concentrates, and Latin America Beverages segments. The Coffee Systems segment manufactures and distributes various finished goods related to its coffee systems, K-Cup pods, and brewers, as well as special coffee. This segment sells its brewers through third-party distributors and retail partners, as well as through its website at keurig.com. The Packaged Beverages segment engages in the manufacture and distribution of packaged beverages of its brands; contract manufacturing of various private label and emerging brand beverages; and distribution of packaged beverages for its partner brands. The Beverage Concentrates segment manufactures and sells beverage concentrates primarily under the Dr Pepper, Canada Dry, Crush, Schweppes, Sun Drop, Sunkist soda, A&W, 7UP, Squirt, Big Red, RC Cola, and Hawaiian Punch brands.
It is the third-largest company in this sector. But the two largest (Coke and Pepsi) are far larger. (KDP) has $ 53 billion market cap while Coke and Pepsi are $ 260 and $ 220, respectively.
My standard format when analyzing a specific company is first to analyze the macroeconomic backdrop for the company, followed by a look at the financials and, finally, the stock chart.
Total establishment jobs (left) are growing at a healthy rate which has caused a drop in the unemployment rate (right) to 3.8%.
A strong jobs market supports rising incomes. Total income less transfer payments (left) are just shy of a 5-year high while the Y / Y percentage change in earnings (right) is rising at a strong clip.
Rising incomes support strongly increased sales, which explains the fact that total general merchandise store sales are near a 5-year high.
Overall, the macroeconomic situation is very positive.
Now, let’s turn to the financials:
Revenue has been heading higher for the most part during the last 10 years. Since (KDP) is a mature company, that’s important.
During the last 10 years, gross, operating, and net margins have risen – another good sign.
The top two rows show cash from operations and investing. The third row shows the difference. This result has been positive in nine of the last 10 years, meaning the company generates sufficient cash to fund current investment. The next row shows total dividend payments, which are subtracted from the number in the row above. The difference shows that in eight of the last 10 years, the company has generated sufficient cash to pay its dividend. Both negative years involved large cash acquisitions, adequately explaining the shortfall.
The last three rows show another measure of cash flow – earnings before interest and taxes. The bottom row subtracts interest payments and dividend payments from EBIT. The results are in the bottom row.
Overall this is a solid company. Revenue is rising, margins are increasing, and the company has ample cash flow.
But there are three downsides that argue against acquiring this stock right now.
First, it’s only yielding 1.98%. That’s too little in the current environment.
Second, analysts are downgrading the earnings prospects:
A majority of analysts have downgraded earnings estimates.
(KDP) has enjoyed a solid rally recently. But that’s about to end. The stock and its sector have peaked relative to the SPY. Both are headed lower.
Finally, the stock recently printed a triple top and has sold off a bit.
The financials and economic backdrop tell use what to buy. On both counts, (KDP) is a solid investment. The charts tell us when to buy. There the answer is clearly, “not now.”