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Why Is Keurig Dr Pepper (KDP) Down 8.8% Since Last Earnings Report?

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A month has gone by since the last earnings report for Keurig Dr Pepper (KDP - Free Report) . Shares have lost about 8.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Keurig Dr Pepper due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Keurig Dr Pepper Beats on Q3 Earnings, Retains View

Keurig Dr Pepper, the newly formed company after the merger of Dr Pepper Snapple Group (“DPS”) and Keurig Green Mountain (“KGM”), reported strong numbers for third-quarter 2018. The company’s earnings topped the Zacks Consensus Estimate while sales missed.

Quarterly Highlights

In the third quarter, adjusted earnings per share of 30 cents improved 43% year over year and beat the Zacks Consensus Estimate of 27 cents. The improvement was aided by an increase in adjusted operating income and a lower tax rate due to the Tax Cuts and Jobs Act. Additionally, cash distribution from BODYARMOR, related with Keurig Dr Pepper’s interest in it as a stakeholder, boosted results.

Net sales of $2,732 million missed the consensus estimate of $2,827 million but more than doubled (up 139.6%) from the year-ago quarter figure of $1,140 million. The solid year-over-year improvement is attributed to benefits from the merger. Adjusted pro forma net sales of $2.86 billion were up 2.9% on the back of robust volume/mix growth, offset by currency headwinds and lower realized price.

Notably, volume/mix improved 3.6% while prices dipped 0.2%. Moreover, unfavorable currency rates impacted revenues by 0.5%.

During the third quarter, the company also benefited from strong retail market performance as measured by IRI. It reported market share gains in both units and dollars for its CSD portfolio as both Dr Pepper and Canada Dry continued to gain traction. Further, its coffee portfolio delivered solid results on the back of unit growth for single-serve pod category as well as improved market share for pods produced by Keurig Dr Pepper.

Adjusted operating income grew 14.3% year over year to $697 million, driven by solid sales growth, strong productivity and lower marketing costs due to timing, offset by higher input costs and logistics. Moreover, adjusted operating margin expanded 240 basis points (bps) to 24.4%.

Segmental Details

Revenues from the Beverage Concentrates segment were $317 million. Adjusted pro forma revenues improved 3.1% to $331 million due to higher pricing and favorable volume/mix, offset by unfavorable currency rates.

Packaged Beverage segment’s sales totaled $1,238 million. Adjusted pro forma sales rose 4.9% to $1,336 million, backed by higher volume/mix, partly negated by lower pricing and currency headwinds.

Revenues from the Latin America Beverage segment were $124 million. Adjusted pro forma revenues advanced 2.3% to $136 million, driven by improved price realization, offset by reduced volume/mix and unfavorable currency.

Coffee Systems segment’s sales were $1,053 million compared with $1,140 million for the year-ago quarter. Adjusted pro forma sales grew 0.4% to $1,053 million, aided by volume/mix growth, almost fully offset by lower pricing and currency headwinds.

Financials

The company’s cash and cash equivalents were $94 million as of Sep 30, 2018, compared with $90 million as of Dec 31, 2017. Long-term obligations totaled $14,275 million while stockholders equity was $22,293 million. Net cash provided by operating activities totaled nearly $1,063 million as of Sep 30, 2018.

Outlook

Keurig Dr Pepper continues to anticipate adjusted pro forma earnings per share of $1.02-$1.07 for 2018, including the impact of current preliminary Purchase Price Accounting adjustments of 4 cents per share.

For the long term, the company expects to generate deal synergies of nearly $600 million between 2019 and 2021, with about $200 million savings anticipated every year. Additionally, the company expects significant cash flow generation and rapid deleveraging, targeting leverage ratio of less than 3.0 in two to three years. Furthermore, Keurig Dr Pepper expects to deliver average annualized adjusted pro forma EPS growth rate of 15-17% between 2018 and 2021.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 7.06% due to these changes.

VGM Scores

At this time, Keurig Dr Pepper has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Keurig Dr Pepper has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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