Keurig Dr Pepper Could Outperform Even In A Recession, Goldman Sachs Says In Upgrade

Keurig Dr Pepper Inc KDP seems poised to beat second-quarter expectations and raise its full-year guidance, according to Goldman Sachs.

The Keurig Dr Pepper Analyst: Bonnie Herzog upgraded Keurig Dr Pepper from Neutral to Buy and raised the price target from $27 to $33.

The Keurig Dr Pepper Thesis: The Goldman Sachs analyst named Keurig Dr Pepper’s revenue and profit growth prospects as the top reason Thursday's upgrade. (See Herzog's track record here.)

Keurig Dr Pepper’s household penetration is expected to increase from 23% in 2019 to 29% by 2025, which will support acceleration in the coffee segment’s revenue growth to 5.5% compounded annually through 2025, the analyst said.

While pointing out that the company’s packaged beverage portfolio is well-suited in the shelter-in-place environment, Herzog said the portfolio could continue to outperform during the recessionary period, as it typically sells at below-average price points. 

The analyst named four more reasons for the upgrade:

• Upside to full-year guidance: Management may raise the net sales guidance to the high end of the 3%-4% range and the earnings outlook from $1.38-$1.40 per share to $1.40-$1.42 per share.
• Further deleveraging: The company has strong cash flows that can be deployed in a number of value-accretive strategies, including acquisitions and share repurchases.
• Margin expansion: The company’s merger-related cost savings targets appear conservative and the company’s potential revenue synergies are underappreciated.
• Attractive valuation: The stock trades at a 9% discount to its three-year historical average despite accelerating revenue growth.

KDP Price Action: Shares of Keurig Dr Pepper were up 2.69% at $29.38 at the time of publication Thursday.

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