SunTrust: Keurig Dr Pepper Combination 'Isn't So Crazy'

At home coffee brewing system and beverage seller Keurig merged with soft drink and beverage maker Dr Pepper in July to create a new company called Keurig Dr Pepper Inc KDP.

The Analyst

SunTrust Robinson Humphrey's William Chappell, Jr. initiated coverage of Keurig Dr Pepper with a Buy rating and $35 price target.

The Thesis

Investors who didn't understand the rationale behind the July merger shouldn't be faulted given the very different product formats, manufacturing and distribution profiles, Chappell said in the note. But the logic behind the merger "isn't so crazy." Specifically, the combined entity can better target three key growth areas in the beverage industry.

• Keurig Dr Pepper's emphasis on flavor gives millennials products that are different from what "their parents consumed," the analyst wrote. This is a key reason why Dr Pepper and Diet Dr Pepper grew at 2.2 percent in 2017 while the overall market declined by 0.6 percent.
• Keurig has an expertise in convenience as its core single serve coffee pods serve a cup of coffee in seconds. Despite the price of a K-cup costing up to 10 times that of a traditionally brewed cup of coffee, sales of K-cups continues to outperform bagged coffee.
• Dr Pepper boasts several flavored water brands like Bai and Core, which fits in with well with millennials who no longer want just purified or spring water but want flavored water with nutrients or PH balance. The combined entity is likely to seek out additional water brands that fit in with the niche category.

Price Action

Shares of Keurig Dr Pepper were trading higher by 2 percent at $26.48.

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