RBC: Keurig Dr Pepper Growth 'Gets Another Jolt', 'Monster' Results From Monster Beverage

RBC analysts maintained a bullish stance on Keurig Dr Pepper Inc KDP and Monster Beverage Corp MNST after the two beverage giants reported encouraging fourth quarter results.

The Keurig Dr Pepper and Monster Beverage Analyst: Nik Modi maintains an Outperform rating on Keurig Dr Pepper's stock with an unchanged $37 price target. Modi also maintains an Outperform rating on Monster Beverage's stock with an unchanged $104 price target.

The Monster Beverage Thesis: Monster Beverage posted "very strong results" that suggest momentum continued into 2021, Modi wrote in a note. The three main positive takeaways from the company's fourth quarter earnings report are:

1. US net sales growth of 16.3% beat expectations of 8% and improved 720 basis points sequentially to 11.8% on a two-year average basis.

2. International net sales improved by 20.4% in the quarter and 18.5% on a two-year average basis. The performance was "solid" as the company was up against difficult restrictive measures, especially across Europe.

3. January gross sales were higher by 17.2% year-over-year despite two fewer selling days.

Two negative takeaways that are worth noting are: 1) Net sales were impacted by $15.2 million due to product returns in Europe and a labelling issue in Japan, and 2) gross margin contracted by 75 basis points even when the returns are excluded.

Management said it will provide a product update soon although its tone on a hard seltzer launch "was a bit less optimistic" than prior commentary, Modi wrote. While a hard seltzer launch could come in 2022, near-term products will likely focus on caffeinated and non-alcoholic seltzers.

Related Link: Wells Fargo Taps Coca Cola, Monster In The Beverage Stock Race

The Keurig Dr Pepper Thesis: Keurig Dr Pepper saw continued momentum in the coffee category along with gains in packaged beverages, Modi wrote in a note. The three main takeaways from the company's fourth quarter earnings report are:

1. Coffee Systems shows a (constant currency) sales growth rate of 8.9% in the quarter while the two-year average sales growth accelerated 4 percentage points since September at 6.5%.

2. Packaged beverages grew 7.9% versus the consensus estimate of 5%. The momentum was driven by volume and price mix and cold beverage market share gains.

3. Management's target market of households that could convert to a single-serve coffee machine stands at 60 million.

Looking forward to 2021, Keurig Dr Pepper expects to exceed its original merger target of 2% to 3% annual revenue growth and deliver synergies of $200 million, the analyst wrote. Management is also targeting 3% to 4% sales growth and EPS growth of 13% to 15% in 2021.

"We believe KDP has a very unique combination of strong underlying growth and significant balance sheet optionality," Modi wrote.

KDP, MNST Price Action: Shares of Keurig Dr Pepper ended Friday at $30.52, down 1.10%, while shares of Monster Beverage were up 2.8% at $87.74.

Photo by Katherine Kromberg on Unsplash.